Join Mailing List

For latest news and information about Treasury and Financial Markets, enter your details below:

Market Guides > Interest rate swaps

Print Preview Send to a Friend Share

Published: 20th September 2009 by William Webster

When two parties agree to enter an interest rate swap (IRS) one party pays a fixed rate of interest and the other a variable rate. The variable rate is often referenced to Libor or Euribor. The interest payments are based on a notional amount, (with IRS no principal amount changes hands). In the market there are conventions for calculating the interest payments. For example USD IRS use an annual actual 360 interest rate calculation for the fixed payment and a quarterly or semi annual actual 360 calculation for the floating payment.

Maturities are normally between 2 and 20 years but it is possible to trade swaps that have maturities exceeding 50 years. Customers using swaps to hedge can expect a dealer to quote a dealing spread. The dealer will want to receive a higher fixed rate than the one they pay. It's one way the dealer makes money from trading.
Dealers will insist before trading that the appropriate documentation is signed. For swaps standard documentation is provided by the International Swaps and Derivatives Association (ISDA). This document is called a master agreement. It covers all swaps between the two parties. Individual transactions are then agreed by confirmation which refers to the master agreement.

Register for free or login to view the full publication

Document Summary

How a swap works. The interest payments and maturity. Documentation. Amortising, accreting and forward starts. Hedging with swaps, example. Risk taking with swaps, example. Valuation, cancellation, novation. Counterparty credit exposure. Collateral management.

Related Documents

Free to ViewTraining Courses > Interest Rate & Currency Swaps 100% relevant


Free to ViewShort courses>Interest rate swaps 64% relevant


Registration Requiredelearning > Interest rate swaps 64% relevant

Learn about the following: What interest rate swaps are and how they work. How dealers make (and lose) money with swaps. How swaps can be used to manage risk. The key risks with swaps. How these risks can be controlled.


Free to ViewUsing Interest Rate Swaps 64% relevant


Registration RequiredInterest Rate Swaps 55% relevant


Registration RequiredMarket Guides > Gap reports - how do you use them? 46% relevant

14th October 2009

Gap reports show you the interest rate risk you are running in your balance sheet. They put the assets and liabilities into time buckets in accordance with their interest rate repricing. From this simple approach you can obtain a table or graph of the risk being run. This normally includes a profit and loss figure that results from moving the yield curve. Gap limits are also applied in order to keep the interest rate exposure within risk tolerence. Gap reports aren't new; they are widely used and have both strengths and weaknesses. Let's find out more.