the market maker intermediary ('FI') is compensated with the spread, 3 bps in this example. 4.985/5.015 is the bid/ask spread, just like you can't buy and sell a stock for exactly the same price at any given moment. Thanks,
For those who complained...i'm sorry guys but cannot get easier than that. David, as usual, is doing a fantastic job, and plain vanilla interest swap rate is pretty intuitive to get...Maybe u should start questioning ur abilities
@TheMalaysianBoy I agree. As an Analyst (and recent finance grad) I am working on my first swap loan and came here for clarity. I just wish these tutorials felt less like a classroom or not like I am listening to that professor who knows a lot but can't communicate his/her knowledge.
Very clear and detailed explanation, thank you very much for posting. What is missing is the motivation *why* would two companies enter the swap? I did the calculation with the values from your example, and there is no value of LIBOR that makes it beneficial for both of them: if one makes profit, the other loses.
David, I wanted to find out what happened in Cassino, Italy - the case with JP Morgan. Your video helped me understand the business behind it. IRS is a very useful / essential derivative in the capital markets but the adage 'Caveat emptor' should never be overlooked. When looking at an Automated Deal Matching system at a bank, I got to learn something and this is one piece that fits in there. The ADM matches all kinds of deals including IRS. Thanks for the great explanation!
bionicturtle, Thanks for the effort. I am part of a team implementing derivative contracts in a data warehouse. You saved me hours of reading, your presentation and the subject you cover has cleared all my question. One request do you have any video on SWAPTION, especially as to how the option pricing is done. Thanks
CFA L2 won't have transaction costs. this is making it a bit more complicated than it needs to be, and usually it takes the perspective of the fixed payer, floating receiver, rather than trying to describe both simultaneously ( just easier to show it that way).
I have a question though on a related but separate note... When valuing swaps, i realise just one floating payment is known so that's used to find the swap rate... but isn't this incorrect because we are equating a stream of fixed rate payments against a single floating rate interest payment? (I know there's no other option since we don't know more floating rate payments so we do it, but still just for conceptual clarity, isn't this theoretically like comparing one apple against 4 oranges?)
You missed the sign on the left from FI. It receives 5% + 1.5bps, yet pays 5% - 1.5bps. As a result, it accumulates the spread, which is 3bps. I believe, this answers your second question too.
Hi will party A and Party B need to exchange the fixed and floating amount, or do the 2 parties only exchange the offset value, ie the net cash flow portion at 7min.
@bionicturtledotcom ur videos are great, thank you so much. are u going to cover all cfa level 1? in terms of finance, (i am not talking about quantitative methods of course and stuff like that)
@TheMalaysianBoy , Rather than just whining and complaining. Why don't you say what part you did not understand. I think the video presenter has done a excellent job.
Thanks David. I have two questions for you: 1) In the diagram you show it looks as though the FI is receiving the 5%+1.5bp and paying that same amount to the Floating Company as part of the swap. In your explanation you said they get paid the 3bp (1.5*2), but I don't see how that happens if they are paying out what they receive from the Fixed Company. I'm sure there is a simple explanation, but I'm just not seeing it.
Nope not true: Co A is receiving in the swap -> 5% - 5 bps = 4.985%, so its net flow is -(5% + 20 bps) - LIBOR + (LIBOR - 5 bps) = -LIBOR - 21.5 bps; as i said in the video, here the intermediary is collecting 3 bps which is the spread between (5% + 1.5 bps) and (5% - 1.5 bps)
While I can guess what's the benefit of Company B of doing this (entering into IR SWAP agreement), not able to understand why Company A needs it?:) Anyone has a more detailed reference? Thnx
Hi Marat Avetisyan Company A has an obligation to pay fixed rate at present. After a while A comes to undestand the interest rates might fall. Being a floating rate payer you can benefit from falling rates. Hence company A wants to enter the swap to convert *pay fixed rate* obligation to *pay floating rate*
So basically instead of paying a fixed i. rate for your loan, it's the counterparty who pays that fixed interest rate for you AND in exchange you pay the float rate of your counterparty??? If I understood well, in order to make a swap you need similar types of loans on both sides BUT different expectations from both counterparties???
Yes. The counterparty (fixed rate payer) who pays that fixed interest rate for you expects interest rates to rise. The fixed rate receiver expects interest rates to fall and thus pays the floating rate for the other party.
See below. 2) It looks like the Fixed Company is paying 5%+20bp on its original loan, but only recieving 5%+1.5bp in the swap and is paying LIBOR. Does the company cover the difference b/w the 1.5bps and 20bps?
Yes, the company will cover the remaining 18.5 bp. I was just about to address that, in the video he says the company A's going to pay 21.5 bp (20+1.5), but it's actually 20-1.5 (from company B) = 18.5 bps.
these are interest rate swaps. Plain vanilla swap = swap interest only , no principle swap because it's in the same currency. you can do interest netting
Hey I'm confused.. company b originally he paid libor +10. After e swap he received libor and used it to cancel out so he paid 5%+10bps. However for company a, . Should it be company A, why should it pay libor plus 21.5 bsp instead of paying libor+18.5bsp?since it should use what it received to cancel out what it originally paid. Pardon my English. Thank you
Much Agreement!
I have an exam on Fixed Income Security tomorrow, and you have *no* idea just how much you've helped me!
the market maker intermediary ('FI') is compensated with the spread, 3 bps in this example. 4.985/5.015 is the bid/ask spread, just like you can't buy and sell a stock for exactly the same price at any given moment. Thanks,
For those who complained...i'm sorry guys but cannot get easier than that. David, as usual, is doing a fantastic job, and plain vanilla interest swap rate is pretty intuitive to get...Maybe u should start questioning ur abilities
@TheMalaysianBoy I agree. As an Analyst (and recent finance grad) I am working on my first swap loan and came here for clarity. I just wish these tutorials felt less like a classroom or not like I am listening to that professor who knows a lot but can't communicate his/her knowledge.
Very clear and detailed explanation, thank you very much for posting.
What is missing is the motivation *why* would two companies enter the swap? I did the calculation with the values from your example, and there is no value of LIBOR that makes it beneficial for both of them: if one makes profit, the other loses.
Thanks for MY time?! It was the best explenation I ever heard and it saved me hours of reading ;) So thank YOU for YOUR time! :)
David, I wanted to find out what happened in Cassino, Italy - the case with JP Morgan. Your video helped me understand the business behind it. IRS is a very useful / essential derivative in the capital markets but the adage 'Caveat emptor' should never be overlooked. When looking at an Automated Deal Matching system at a bank, I got to learn something and this is one piece that fits in there. The ADM matches all kinds of deals including IRS.
Thanks for the great explanation!
@gaabsmrr ha, i am so glad it is helpful. THANK YOU for your comment, I can thank you for that, right? :)
awesome... was wondering of the first floating rate payment is known at inception and you cleared it up!
I dont agree with others,
I am an MBA Final Year student and I did understand everything,
coz I am writing notes on my notebook and Revising it.
Well done! It helps a lot.
Congratulations!
bionicturtle,
Thanks for the effort. I am part of a team implementing derivative contracts in a data warehouse.
You saved me hours of reading, your presentation and the subject you cover has cleared all my question.
One request do you have any video on SWAPTION, especially as to how the option pricing is done. Thanks
CFA L2 won't have transaction costs. this is making it a bit more complicated than it needs to be, and usually it takes the perspective of the fixed payer, floating receiver, rather than trying to describe both simultaneously ( just easier to show it that way).
Thank you for doing this. Very clear!
Thanks for the video! One question - what do you mean by base points?
This is very helpful! thanks a lot!!
@dimpleinso007 thanks i appreciate that. I am sure the criticisms have some validity, but i'm glad it's at least useful to some
solid video! thanks
@TheMalaysianBoy thanks for you feedback
really cool, i'd love to redo this and make it sharper etc, but thrilled it can help ... caeat emptor indeed!
great explanation but what does the bank mean when they quote us 4.00%-4.25% on a 5 yr USD IRS to a customer?
Quick question...does the net cash flow always net out to zero? as it is shown in your table
thanks for this vid! it was helpful
I have a question though on a related but separate note...
When valuing swaps, i realise just one floating payment is known so that's used to find the swap rate... but isn't this incorrect because we are equating a stream of fixed rate payments against a single floating rate interest payment?
(I know there's no other option since we don't know more floating rate payments so we do it, but still just for conceptual clarity, isn't this theoretically like comparing one apple against 4 oranges?)
what do u mean when u say' the notional nets itself out'?
You missed the sign on the left from FI. It receives 5% + 1.5bps, yet pays 5% - 1.5bps. As a result, it accumulates the spread, which is 3bps.
I believe, this answers your second question too.
When you say that a part pays receives/pays LIBOR, do you always mean the six-month LIBOR? Or does it differ from case to case? I'm slightly confused.
Hi will party A and Party B need to exchange the fixed and floating amount, or do the 2 parties only exchange the offset value, ie the net cash flow portion at 7min.
@bionicturtledotcom ur videos are great, thank you so much. are u going to cover all cfa level 1? in terms of finance, (i am not talking about quantitative methods of course and stuff like that)
@TheMalaysianBoy ,
Rather than just whining and complaining. Why don't you say what part you did not understand.
I think the video presenter has done a excellent job.
Thanks David. I have two questions for you:
1) In the diagram you show it looks as though the FI is receiving the 5%+1.5bp and paying that same amount to the Floating Company as part of the swap. In your explanation you said they get paid the 3bp (1.5*2), but I don't see how that happens if they are paying out what they receive from the Fixed Company. I'm sure there is a simple explanation, but I'm just not seeing it.
the net of company A is Libor + 18,5 bps, not 21, 5 you've said
Nope not true: Co A is receiving in the swap -> 5% - 5 bps = 4.985%, so its net flow is -(5% + 20 bps) - LIBOR + (LIBOR - 5 bps) = -LIBOR - 21.5 bps; as i said in the video, here the intermediary is collecting 3 bps which is the spread between (5% + 1.5 bps) and (5% - 1.5 bps)
While I can guess what's the benefit of Company B of doing this (entering into IR SWAP agreement), not able to understand why Company A needs it?:) Anyone has a more detailed reference? Thnx
Hi Marat Avetisyan
Company A has an obligation to pay fixed rate at present. After a while A comes to undestand the interest rates might fall. Being a floating rate payer you can benefit from falling rates. Hence company A wants to enter the swap to convert *pay fixed rate* obligation to *pay floating rate*
I hv an exam in three hours this helped me alot Loll
I would give you a medal if I could :D
So basically instead of paying a fixed i. rate for your loan, it's the counterparty who pays that fixed interest rate for you AND in exchange you pay the float rate of your counterparty???
If I understood well, in order to make a swap you need similar types of loans on both sides BUT different expectations from both counterparties???
Yes. The counterparty (fixed rate payer) who pays that fixed interest rate for you expects interest rates to rise. The fixed rate receiver expects interest rates to fall and thus pays the floating rate for the other party.
See below.
2) It looks like the Fixed Company is paying 5%+20bp on its original loan, but only recieving 5%+1.5bp in the swap and is paying LIBOR. Does the company cover the difference b/w the 1.5bps and 20bps?
Yes, the company will cover the remaining 18.5 bp. I was just about to address that, in the video he says the company A's going to pay 21.5 bp (20+1.5), but it's actually 20-1.5 (from company B) = 18.5 bps.
these are interest rate swaps. Plain vanilla swap = swap interest only , no principle swap because it's in the same currency. you can do interest netting
awesome...
Dheeraj rajoriya plz explain in Hindi
Screw Kaplan!!! Harper is here :)
@MochaC89 I can refund your money. Oh nevermind, it's free. Thanks for your support
because you're writing notes in your notebook and revising shouldn't be capitalized. where are you doing your MBA?
It was help full
financial institution needs to be paid, it's called spread
Hey I'm confused.. company b originally he paid libor +10. After e swap he received libor and used it to cancel out so he paid 5%+10bps.
However for company a, . Should it be company A, why should it pay libor plus 21.5 bsp instead of paying libor+18.5bsp?since it should use what it received to cancel out what it originally paid. Pardon my English. Thank you
Que lástima que no pongas subtítulos en español, pues parece interesante la explicación
Very complex presentation. This could've been explained more simple way.
video is too good.......
these are interest rate swaps. Plain vanilla swap = swap interest only , no principle swap because it's in the same currency.
1 basis point = 0.01%
Gud
Thank you for that textbook definition. What a waste of time.
100 bps = 1%
@bionicturtledotcom Haha, yes, that's okey ;)
@adamish1134 this guy is a dunce. He is making this more complicated then it needs to be.
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@MegaVenerable learn english
this sucks
Quick question...does the net cash flow always net out to zero? as it is shown in your table
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