This is the capstone — one graded run across the entire course. The questions roam over everything: how a swap’s two legs trade fixed for floating and why only the net settles, how a forward rate agreement is the single-period atom a swap is built from, how to value a swap as one bond minus another and pin its par rate, how the swap curve is bootstrapped and why collateralised trades discount on OIS, why LIBOR died and how a secured overnight rate replaced it, how swap spreads can turn negative without anyone thinking banks are safer than governments, how caps, floors and swaptions add optionality, and how a single swap overlay can flatten the DV01 of an entire book. There is no formula sheet and no second guess — read all four options before you commit, because each wrong one is a trap that has caught a real trainee.
How this exam works
This is a graded exam. Questions arrive one at a time. Once you submit an answer it is final — there is no going back, no retries, and a wrong answer simply fails that question. Your score stays hidden until the very end, where you need 70% to pass. Slow down and read every option before you commit.
In a plain-vanilla interest-rate swap on a $100 million notional, what actually changes hands on each payment date?
Select an answer to continue.
Course Recap
Whatever your score reads, the framework you just stress-tested — two legs trading fixed for floating with only the net settling, the FRA atom that builds a swap, the two-bond valuation and the par rate, the curve you bootstrap and discount on OIS, the secured overnight rate that buried LIBOR, the spreads and asset swaps that quote a bond against the curve, the caps, floors and swaptions that add optionality, and the DV01 overlay that flattens a book — is the working map of the largest derivatives market on earth. Here is the whole course in one glance.
Big picture
Swaps & Rate Derivatives, in one glance
- Swaps & Rate Derivatives
- What a swap is
- Pay fixed (payer) vs receive fixed (receiver)
- Notional is reference only — never exchanged
- Only the net interest settles each period
- Uses: liability transformation, comparative advantage
- Risk = mark-to-market, not the notional
- FRAs & forward rates
- FRA locks one future period rate; "3x9" = months 3 to 9
- Settles discounted at the START of the period
- Fair FRA rate = the forward rate
- A swap = a strip of FRAs at one averaged fixed rate
- Pricing as two bonds
- Receiver = long fixed bond − short floating bond
- Floating bond ≈ par at each reset
- Value(receiver) = PV(fixed bond) − notional
- Par swap rate = (1 − DFn) / Σ τ·DF
- Receiver gains when rates fall
- Swap curve & OIS discounting
- Term structure of par swap rates
- Bootstrap to discount factors & forwards
- Upward par curve ⇒ forwards above it
- Collateral earns overnight ⇒ discount on OIS
- Dual curve: project off index, discount off OIS
- SOFR & the death of LIBOR
- LIBOR: unsecured, term, survey-based; rigged + thin
- SOFR: secured, overnight, transaction-based, risk-free
- Compounded in arrears; Term SOFR for cash products
- Credit spread adjustment converts legacy LIBOR
- Swap spreads & asset swaps
- Swap spread = swap rate − govt yield (bp)
- Long-end can go negative: balance sheet + receiving flows
- Not because banks beat the sovereign
- Asset swap = bond + swap = synthetic floater + ASW spread
- Caps, floors & swaptions
- Cap = strip of caplets (calls); bounds a borrower
- Floor = strip of floorlets (puts); protects a lender
- Long cap − short floor = payer swap (rate parity)
- Swaption: payer gains if rates rise, receiver if they fall
- Priced off rate volatility (Black-76)
- Hedging a rate book
- Swap DV01 ≈ fixed-leg DV01
- Hedge notional = DV01_book / DV01-per-unit
- Bank/ALM pays fixed; pension/LDI receives fixed
- Residuals: curve, basis, convexity — not risk-free
- What a swap is
Key Takeaways
What you now own
You can build a swap from a fixed leg and a floating leg, explain why only the net settles and why the notional is never at risk, and reach for a payer or receiver swap to transform a liability or harvest comparative advantage. You can decompose a swap into a strip of FRAs, value it as a fixed bond minus a floating one, and solve for the par swap rate that makes a fresh swap worth zero. You can read the swap curve, bootstrap it, and discount collateralised cash flows on OIS the way every desk now does. You know why LIBOR died and how a secured, overnight, compounded-in-arrears SOFR replaced it. You can quote a swap spread, explain how the long end goes negative without insulting the sovereign, and strip a bond into a clean asset-swap spread. You can bound a floating cost with a cap, protect a lender with a floor, recognise a swaption inside a callable bond, and — the payoff of the whole course — size a swap overlay that drives an entire book’s DV01 to near zero while naming the curve, basis, and convexity risks it leaves behind. That is the swaps-and-rate-derivatives toolkit, end to end.