Vanilla Vanillas Floating RateFloating rates Instruments and Swaps

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 7 in Capital Market Finance, 2022, pp 205-253 from Springer

Abstract: Abstract The first category of instruments with floating interest rates (floaters) is made up of assets like notes and bonds which distribute floating coupons. They are used to transfer liquidity (investment/financing). Their market values fluctuate around their nominal value. According to the rules that govern the calculation of coupons, these assets are said to have “forward-looking” (pre-determined) rates or “backward-looking” (post-determined) rates. The simplest floaters, vanilla floaters, are replicable by a sequence of spot short-term transactions on the money market. Interest rate swaps make up the second category of floating-rate instruments and aim to manage interest rate risk. An interest rate swap can be analyzed as a portfolio with two components of opposite sign, one usually a fixed-rate instrument and the other a floating-rate instrument. Its market value, which is initially nil, in general, remains very small over its life although it varies as a function of interest rates.

Date: 2022
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DOI: 10.1007/978-3-030-84600-8_7

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