scholarly journals Interest Rate Swap Market Complexity and Its Risk Management Implications

Complexity ◽  
2018 ◽  
Vol 2018 ◽  
pp. 1-20
Author(s):  
Steve Y. Yang ◽  
Esen Onur
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Network Structure ◽  
Risk Sharing ◽  
Interest Rate Swap ◽  
Market Participants ◽  
Interest Rate Futures ◽  
The Interest Rate ◽  
Management Behaviors ◽  
Rate Swap

The primary objective of this paper is to study the post Dodd-Frank network structure of the interest rate swap market and propose a set of effective complexity measures to understand how the swap users respond to market risks. We use a unique swap dataset extracted from the swap data repositories (SDRs) to examine the network structure properties and market participants’ risk management behaviors. We find (a) the interest rate swap market follows a scale-free network where the power-law exponent is less than 2, which indicates that few of its important entities have a significant number of contracts within their subsidiaries (a.k.a. interaffiliated swap contracts); (b) swap rate volatility Granger-causes swap users to increase their risk sharing intensity at entity level, but market participants do not change their risk management strategies in general; (c) there is a significant contemporaneous correlation between the swap rate volatility and the underlying interest rate futures volatility. However, interest rate swap volatility does not cause the underlying interest rate futures volatility and vice versa. These findings provide the market regulators and swap users a better understanding of interest rate swap market participants’ risk management behaviors, and it also provides a method to monitor the swap market risk sharing dynamics.

Yield Curves, Swap Curves, and Term Structure of Interest Rates

2019 ◽  
pp. 203-228
Author(s):  
Tom P. Davis ◽  
Dmitri Mossessian
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Yield Curves ◽  
No Arbitrage ◽  
Interest Rate Swap ◽  
The Interest Rate ◽  
Rate Swap ◽  
The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

Savings and Loan Capital and the Use of Interest Rate Swaps

1992 ◽  
Vol 36 (2) ◽  
pp. 50-57
Author(s):  
David Vang
Keyword(s):  
Interest Rate ◽  
Financial Institutions ◽  
Interest Rate Risk ◽  
Interest Rate Swap ◽  
Savings And Loan ◽  
Interest Rate Swaps ◽  
Flexible Rate ◽  
The Interest Rate ◽  
The Relationship ◽  
Rate Swap

This paper models the relationship between interest rate swaps and capital in savings and loan associations. The interest rate swap is a way in which financial institutions exchange the flexible rate on their liabilities with a fixed interest rate to hedge themselves from interest rate risk, and therefore reduce the need for a capital cushion. The empirical evidence, however, shows that a small capital cushion reduces the firm's possibility of using interest rate swaps because no partner is willing to engage in a rate swapping contract with a firm that does not have adequate capital and soundness.

Covered Interest Rate Arbitrage Trading and Negative Spreads of Interest rate Swap in Korea

2010 ◽  
Vol 18 (1) ◽  
pp. 43-75
Author(s):  
Seungyeon Won
Keyword(s):  
Interest Rate ◽  
Capital Market ◽  
Foreign Investors ◽  
Interest Rate Swap ◽  
Arbitrage Trading ◽  
The Interest Rate ◽  
Korean Market ◽  
Swap Spreads ◽  
Rate Swap

This paper empirically shows that the long-term persistence of negative swap spreads, which was unique phenomenon only in Korean interest rate swap market, could be caused by the covered interest rate arbitrage trading by foreign investors in Korean market. It concretely shows the fixed rates of currency swap, whose decreases expand the incentive for arbitrage trading by foreign investors, to positively influence the interest rate swap spreads. The empirical results suggests that the foreign factors might make more effect on the interest rate swap market than the spot bond market, resulting in the negative interest rate swap spreads. The results implies that, the asset pricing for interest rate swap needs to consider the foreign factors under the circumstances of open capital market.

scholarly journals Cross-Currency Interest Rate Swap Application in the Long-Term Currency Risk Management

2020 ◽  
Vol 54 (2) ◽  
pp. 113
Author(s):  
Piotr Wybieralski
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Risk Estimation ◽  
Cash Flows ◽  
Currency Risk ◽  
Money Markets ◽  
Interest Rate Swap ◽  
Risk Hedging ◽  
Rate Swap

<p>Effective currency risk management using various derivatives is particularly important under increased market volatility. The risk is relatively higher for longer than shorter time frames. This study highlights the implementation of selected instruments for long-term hedging. It presents the application of cross-currency interest rate swap as a currency risk hedging tool used by Polish exporters, mainly manufacturers generating their revenues mostly abroad (in euro area), exposed to negative exchange rate fluctuations. The paper covers issues related to the pricing, market risk estimation and collateral required in the OTC market, as well as undertakes a sensitivity analysis in search for exchange rates at which margin call occurs. There is a comparative analysis and back test simulation conducted using market data from exchange and money markets. The study emphasized that the analyzed instrument meets the expectations in terms of hedging the company cash flows, as well as may generate additional benefits due to the still existing interest rate differential.</p>

xVA: DEFINITION, EVALUATION AND RISK MANAGEMENT

2020 ◽  
Vol 23 (01) ◽  
pp. 2050006
Author(s):  
LIXIN WU ◽  
DAWEI ZHANG
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Liquidity Risk ◽  
Credit Default Swaps ◽  
Interest Rate Swap ◽  
Funding Liquidity ◽  
Credit Default ◽  
Risk Neutral ◽  
Default Risks ◽  
Rate Swap

xVA is a collection of valuation adjustments made to the classical risk-neutral valuation of a derivative or derivatives portfolio for pricing or for accounting purposes, and it has been a matter of debate and controversy. This paper is intended to clarify the notion of xVA as well as the usage of the xVA items in pricing, accounting or risk management. Based on bilateral replication pricing using shares and credit default swaps, we attribute the P&L of a derivatives trade into the compensation for counterparty default risks and the costs of funding. The expected present values of the compensation and the funding costs under the risk-neutral measure are defined to be the bilateral CVA and FVA, respectively. The latter further breaks down into FCA, MVA, ColVA and KVA. We show that the market funding liquidity risk, but not any idiosyncratic funding risks, can be bilaterally priced into a derivative trade, without causing price asymmetry between the counterparties. We call for the adoption of VaR or CVaR methodologies for managing funding risks. The pricing of xVA of an interest-rate swap is presented.

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