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movements. Swaps dealers trade with both end-users and other
dealers.
b. Practice as to Swaps
Swaps dealers maintain a portfolio of swaps on their books
and usually attempt to maintain a neutral, hedged position in the
market. Swaps dealers attempt to maintain a neutral, hedged
position either by: (1) Serving as a counterparty to opposite
sides of two matching swaps or (2) managing the overall structure
of the portfolio so as to minimize the net exposure to interest
rate movements.
c. Price Quotations
Prices in the interest rate swaps market are quoted in the
form of interest rates, and major swaps dealers (e.g., FNBC)
regularly quote the bid and ask prices at which they stand ready
to buy and sell plain vanilla interest rate swaps with standard
maturities of 1, 2, 3, 5, 7, and 10 years. The bid price is the
fixed interest rate that the dealer is ready to pay in exchange
for a specified floating rate. The ask price is the fixed
interest rate that the dealer demands to receive in exchange for
paying a specified floating rate. The ask rate is greater than
the bid rate, and the dealer’s profit when taking the opposite
sides on two identical swaps is the difference between the fixed
rate it receives and the fixed rate it pays.
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