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What are Swaps? Financial Derivatives Tutorial financial derivatives



In todays video we learn about Swaps.

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link.
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What is a Swap?

A swap is a financial derivative in which two counterparties exchange cash flows of one party’s financial instrument for those of the other party’s financial instrument. For example, in the case of a swap involving two bonds, the two parties would be exchanging the periodic interest (coupon) payments associated with the bonds. With a swap the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.

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The cash flows are calculated over a notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral.

Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. .

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What are Swaps? Financial Derivatives Tutorial

What are Swaps? Financial Derivatives Tutorial

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What are Swaps? Financial Derivatives Tutorial
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21 thoughts on “What are Swaps? Financial Derivatives Tutorial financial derivatives”

  1. Are there entities that create custom swaps? This would do away with the need to go out and find counterparties like brokers do. Or is this something that dealers would engage in?

  2. Well done. Your presentations are fabulous. One could make a point in favor of different forms of derivatives (in your example of swaps). One could also make a point against derivatives (credit default swaps, synthetic CDO’s) and the countless bets made by pure speculation. Perhaps a video on what was done prior to the 1st swap you made as an example (prior to 1981). And the overall size of the derivative markets combined? And the inherent danger of these derivatives going wildly wrong.

  3. "This is really simple"
    Proceeds to explain something super complicated
    I wish I had found you sooner Patrick, your work is amazing thank you

  4. I worked for a convert-arb hedge fund, where we had to manage optionality and interest rate risk almost on a daily basis. You should do a video on Swap-tions.

  5. Wonderful explanations! I love this chanel, just subscribed. Thank you for the inspiration! May I ask if you tend to own a Range Rover by any chance?

  6. As someone interested in finance without a finance background, I really love your videos because of how clear your explanations are. Thank you for uploading them!

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