1. Interest Rate Derivatives

2. Interest Rate Derivatives
Swaps
Forward Rate Agreements (FRAs):
A one-period, future swap
EuroDollar Futures
Bond Options (Black-76)
Caps/Floors/Collars(Cap&Floor Combo.)
Buy Cap: Get CFs if Mkt Rate>Cap Rate
Buy Floor: Get CFs if Mkt Rate<Floor Rate
Swaptions: Get/Give CF on both sides of Mkt Chg

3. All-In-Cost
Lay out cash-flows on a timeline and solve for IRR. Looking for least cost.
Exercise 1:
Fixed Bond at 7% annual, 3yrs:
IRR = 7% ==> All-in-Cost

4. All-In-Cost Issue Fltg Rate Note and Swap
Swap: Fixed(T-Note, 4.5%+0.3%+2%) for Floating (LIBOR+2%)
IRR = 6.8% ==> All-in-Cost

5. All-In-Cost FRAs: Issue Fltg Rate Note and FRAs 0 1 2 3
(12/24 has 1 year (in 1 year) at 5% vs. LIBOR, or 7% vs. LIBOR+2%)
(24/36 has 1 year (in 2 years) at 8% vs. LIBOR+2%)
Issue Fltg Rate Note and FRAs
First year CF=5.7 as known at FRA contract.
IRR = 6.85% ==> All-in-Cost

6. All-In-Cost Cap/Floor Strikes vs LIBOR so add 2%
Buy Cap (-Prem), Sell Floor (+Prem), Net combined with $100 t=0, borrowing:
AICs = 6.78, 6.80, 6.84, 6.81%