BOND MATH: The Theory Behind the Formulas

CHAPTER 8

Interest Rate Swaps

The unprecedented interest rate volatility in the U.S. in the 1970s and 1980s created demand for risk management products and strategies. Swaps emerged from that time period and since then have become the primary derivative contract used in practice to hedge interest rate risk. Of course, there are some actively traded fixed-income and interest rate futures contracts, in particular, on Treasury notes and bonds and on 3-month LIBOR, but swaps have come to dominate because of their flexibility and operational ease for many end users. End users are those entities (including financial institutions, investment funds, companies, universities, and state and local governments) that either want or need an interest rate derivative. ...