Fixed Interest Player v/s Floating Interest Player: Tug of War
Author(s)
Naseem Ahamed
ABSTRACT
Swaps have been one of the most widely used derivatives since 1970s and for good reasons. Interest rate swap is a mutual agreement between two parties to pay each other the differential amount of up and above the fixed v/s LIBOR. This paper tries to answer the long standing question of what should have been the range around which the fixed rate should have hovered with respect to fluctuating LIBOR over the years to attain break-even and not to be worse off. This paper analyses for the difference in the average LIBOR of various periods (1 month, 3 months, 6 months and 12 months) with respect to different maturity dates (5 years, 10 years, 15 years, 20 years and 23 years). It looks for the presence of structural change in the trend of LIBOR beginning from 1990 to 2013. This paper will draw the attraction of academic as well as market participants. Fixed rate player refers to the party which agrees to pay the existing floating rate (LIBOR) in the market in exchange of an agreed upon fixed rate from the counter party and vice-versa.
Swaps have been one of the most widely used derivatives since 1970s and for good reasons. Interest rate swap is a mutual agreement between two parties to pay each other the differential amount of up and above the fixed v/s LIBOR. This paper tries to answer the long standing question of what should have been the range around which the fixed rate should have hovered with respect to fluctuating LIBOR over the years to attain break-even and not to be worse off. This paper analyses for the difference in the average LIBOR of various periods (1 month, 3 months, 6 months and 12 months) with respect to different maturity dates (5 years, 10 years, 15 years, 20 years and 23 years). It looks for the presence of structural change in the trend of LIBOR beginning from 1990 to 2013. This paper will draw the attraction of academic as well as market participants. Fixed rate player refers to the party which agrees to pay the existing floating rate (LIBOR) in the market in exchange of an agreed upon fixed rate from the counter party and vice-versa.
Cite this paper
Ahamed, N. (2015) Fixed Interest Player v/s Floating Interest Player: Tug of War. Theoretical Economics Letters, 5, 469-475. doi: 10.4236/tel.2015.54055.
Ahamed, N. (2015) Fixed Interest Player v/s Floating Interest Player: Tug of War. Theoretical Economics Letters, 5, 469-475. doi: 10.4236/tel.2015.54055.
References
[1] Brown, K.C., Harlow, W.V. and Smith, D.J. (1994) An Empirical Analysis of Interest Rate Swap Spreads. The Journal of Fixed Income, 3, 61-78. http://dx.doi.org/10.3905/jfi.1994.408095 [2] Kiff, J., Ron, U. and Ebrahim, S. (2001) The Federal Government’s Use of Interest Rate Swaps and Currency Swaps. Bank of Canada Review, 23-34. [3] James, B. and Chen, A.H. (1986) An Economic Analysis of Interest Rate Swaps. Journal of Finance, 41, 645-656. http://dx.doi.org/10.1111/j.1540-6261.1986.tb04527.x [4] Hull, J.C. (2005) Options, Futures and Other Derivatives. Prentice Hall publishers, Upper Saddle River. [5] Grinblatt, M. (2001) An Analytic Solution for Interest Rate Swap Spreads. International Review of Finance, 2, 113-149. http://dx.doi.org/10.1111/1468-2443.00022 [6] Sheridan, T. (1992) Interest Rate Swaps and Corporate Financing Choices. Journal of Finance, 47, 1503-1516. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04667.x [7] Stuart, T. (1987) Swaps: A Zero Sum Game? Financial Management, 16, 15-21. http://dx.doi.org/10.2307/3665544 [8] Wall, L.D. and Pringle, J.J. (1989) Alternative Explanation of Interest Rate Swap: A Theoretical and Empirical Analysis. Financial Management, 18, 59-73. http://dx.doi.org/10.2307/3665893 [9] Duffie, D. (1999) Credit Swap Valuation. Financial Analysts Journal, 55, 73-87. http://dx.doi.org/10.2469/faj.v55.n1.2243
[1] Brown, K.C., Harlow, W.V. and Smith, D.J. (1994) An Empirical Analysis of Interest Rate Swap Spreads. The Journal of Fixed Income, 3, 61-78. http://dx.doi.org/10.3905/jfi.1994.408095 [2] Kiff, J., Ron, U. and Ebrahim, S. (2001) The Federal Government’s Use of Interest Rate Swaps and Currency Swaps. Bank of Canada Review, 23-34. [3] James, B. and Chen, A.H. (1986) An Economic Analysis of Interest Rate Swaps. Journal of Finance, 41, 645-656. http://dx.doi.org/10.1111/j.1540-6261.1986.tb04527.x [4] Hull, J.C. (2005) Options, Futures and Other Derivatives. Prentice Hall publishers, Upper Saddle River. [5] Grinblatt, M. (2001) An Analytic Solution for Interest Rate Swap Spreads. International Review of Finance, 2, 113-149. http://dx.doi.org/10.1111/1468-2443.00022 [6] Sheridan, T. (1992) Interest Rate Swaps and Corporate Financing Choices. Journal of Finance, 47, 1503-1516. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04667.x [7] Stuart, T. (1987) Swaps: A Zero Sum Game? Financial Management, 16, 15-21. http://dx.doi.org/10.2307/3665544 [8] Wall, L.D. and Pringle, J.J. (1989) Alternative Explanation of Interest Rate Swap: A Theoretical and Empirical Analysis. Financial Management, 18, 59-73. http://dx.doi.org/10.2307/3665893 [9] Duffie, D. (1999) Credit Swap Valuation. Financial Analysts Journal, 55, 73-87. http://dx.doi.org/10.2469/faj.v55.n1.2243