Swaps & Rate Derivatives

Walk into any large bank, pension fund, insurer, or corporate treasury and you will find a swap somewhere near the centre of how they manage interest-rate risk. An interest-rate swap is, at heart, a deal so simple it sounds like it shouldn’t matter: I promise to pay you a fixed interest rate on some agreed amount; you promise to pay me a floating rate on the same amount; and every period we just exchange the difference. The amount itself — the notional — never changes hands. And yet this unglamorous trade is the foundation of the largest derivatives market on the planet, with hundreds of trillions of dollars in notional outstanding.

This is the expert capstone of the rates track. You already know how to price a bond, measure its duration and DV01, bootstrap a yield curve into spot and forward rates, and lock a price with a forward. Here you put all of it to work on the instruments a real rates desk actually trades:

• What a swap is — the fixed leg, the floating leg, why only the net settles, and the two classic motives: transforming a liability and exploiting comparative advantage.
• FRAs & forward rates — the forward rate agreement, the single-period atom of a swap, and the insight that a swap is just a strip of FRAs bolted together.
• Pricing swaps as bond differences — value a swap as a fixed-rate bond minus a floating-rate bond, see why the floating leg is worth par at each reset, and derive the par swap rate that makes a new swap worth zero.
• The swap curve & OIS discounting — build the term structure of par swap rates, read the implied forwards inside it, and discount cash flows on the OIS curve the way every collateralised desk now does.
• SOFR & the death of LIBOR — why a benchmark that underpinned hundreds of trillions was scrapped, and how a secured, overnight, compounded-in-arrears rate replaced it.
• Swap spreads & asset swaps — the gap between swap rates and government yields, why the long end can go negative, and how an asset swap strips a bond down to a clean spread over the floating index.
• Caps, floors & swaptions — the optional cousins: a cap that bounds your floating cost, a floor that protects a lender, and a swaption — the option to enter a swap.
• Hedging a rate book with swaps — the payoff of the whole course: neutralise the DV01 of an entire portfolio with a swap overlay so a rate move barely scratches it.

By the end you’ll build a swap from its two legs, decompose it into FRAs, price it from a curve, discount it correctly, quote it against governments, bound it with options, and use it to flatten the rate risk of a book — exactly the toolkit a swaps trader, an ALM manager, or a fixed-income risk officer carries to work.