Definition
Interest rate swaps are the most traded derivative globally, with over $500 trillion in notional value outstanding. The fixed-rate payer benefits if rates rise (receiving higher floating payments), while the floating-rate payer benefits if rates fall. Swap rates serve as important benchmarks for pricing other fixed-income instruments.
functions Formula
Fixed Payer Cash Flow = Notional × (Fixed Rate − Floating Rate)
lightbulb Example
On $100M notional, Company pays 4.5% fixed and receives SOFR (currently 5.0%). Net payment to company = $100M × (5.0%-4.5%) / 2 = $250K for the semi-annual period.
verified_user Key Points
- Most traded derivative instrument globally
- Fixed-for-floating is the standard structure
- Swap rate is a key market benchmark
- Used for hedging, speculation, and liability management