Seminar: Timely Topics for Today’s Business World Mr. Bernstein Swaps January 12, 2015.

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Seminar: Timely Topics for Today’s Business World Mr. Bernstein Swaps January 12, 2015

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Fixed-to- Floating Rate Firm A borrows at a floating rate. They enter a swap with Firm B to pay a set interest rate and receive a floating rate, converting their interest rate risk into a known price level. 2

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Fixed-to- Floating Rate Firm A pays 3% and receives Libor +.5%. Firm B pays Libor +.5% and receives 3%. At the end of period 1, Libor = 1.0%. Firm A pays Firm B 1.5%. This will continue for 10 years. If Libor rises above 2.5%, Firm B will pay Firm A. Spreads are determined each day in the marketplace. 3

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Equity Index Swap Also useful to gain exposure to many restricted markets 4

Seminar: Timely Topics for Today’s Business World Mr. Bernstein CDS Credit Default Swap Creates a Synthetic Bond Allows leverage Investor gets returns even if bond is not available 5

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Swaps are generally executed OTC (Over the Counter) ISDA = International Swap Dealers Association Industry standard template with custom terms negotiated OTC derivatives contain credit risk vs. counterparties 6

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Size of Swaps Markets 7

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Changes in Interest Rates 8

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Fixed-Floating Pricing: 5 Years of Fixed vs. 3mo LIBOR 9

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