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2. Swaps Are Derivative Financial Products... 17
3. Types of Swaps in the Marketplace......... 19
B. Origin and Growth of the Swaps Market.......... 19
1. Origin of the Market...................... 19
2. Growth of the Interest Rate Swaps Market.. 20
C. Interest Rate Swaps............................ 21
1. Terms of an Interest Rate Swap Agreement.. 21
2. Notional Principal Amount and Related
Terms..................................... 21
3. Different Types of Interest Rates......... 23
4. Use of LIBOR as a Floating Interest Rate
Index..................................... 23
5. Plain Vanilla Interest Rate Swaps......... 25
6. Lack of Payments at Inception............. 27
7. Example of an Interest Rate Swap.......... 27
D. Currency Swaps................................. 28
E. Participants in the Market..................... 29
1. End Users................................. 29
a. Typical End Users.................... 29
b. End Users’ Uses of Interest Rate
Swaps................................ 30
i. Combat Interest Rate Changes.. 30
ii. Prosper From Market Forecast.. 31
iii. Reduce Cost of Funding........ 32
2. Dealers................................... 32
a. Typical Dealers...................... 32
b. Practice as to Swaps................. 33
c. Price Quotations..................... 33
d. Role in the Market................... 34
e. Need for Strong Credit .............. 35
3. Brokers................................... 35
F. Market for Swaps............................... 36
1. Types of Markets.......................... 36
a. Primary Market....................... 36
b. Secondary Market..................... 36
2. Brokers’ Dissemination of the Dealers’
Quotations................................ 37
a. Daily Quotations..................... 37
b. No Dissemination of Actual
Swap Prices.......................... 39
c. Spreads Included in Quotations....... 39
3. Midmarket Rate............................ 42
4. Midmarket Swap Curve...................... 43
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Last modified: May 25, 2011