The Pricing and Valuation of Swaps Georgia （互换的定价和估值格鲁吉亚）.pdf

The Pricing and Valuation of Swaps1 I. Introduction The size and continued growth of the global market for OTC derivative products such as swaps, forwards, and option contracts attests to their increasing and wide-ranging acceptance as essential risk management tools by financial institutions, corporations, municipalities, and government entities. Findings from a recent Bank of International Settlements (BIS) survey indicate that outstanding notional amounts of these products as of mid-year 2008 surpassed $516 trillion or $20.4 trillion in gross market value, which represents the cost of replacing all open contracts at prevailing market prices. Of these totals, interest rate swaps alone accounted for $357 trillion in notional amount or $8.1 trillion in gross market value. In this chapter we focus on this important component of the market for derivatives— swaps—and provide a primer on how they are priced and valued. While our emphasis is largely on interest rate swaps, the framework we present is applicable to a wide array of swaps including those based on currencies and commodities.2 In addition, we provide a number of examples to illustrate such applications. The tools presented should prove useful to students of these markets having interests in trading, sales, or financial statement reporting. A general description of a swap is that they are bilateral contracts between counterparties who agree to exchange a series of cash flows at periodic dates. The cash flows can be either fixed or floating and are typically determined by multiplying a specified notional principal amount by a referenced rate or price. To illustrate briefly a few common types of swaps that we examine