counter party credit risk in interest rate swaps during times of market com

8/8/2019 Counter Party Credit Risk in Interest Rate Swaps During Times of Market com

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94 95 96 97 98 99 00 01 02 030

20

40

60

80

100

120

140

Basis

Points

2year5year10year

Figure 1Historical Swap Spreads


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2 3 4 5 6 7 8 9 105.8

5.9

6

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

maturity (years)

percent

ActualImplied by futures

Figure 2Average swap curve (Jan 1994 Mar 2002)


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93 94 95 96 97 98 99 00 01 02 0350

100

150

200sixmonth/fiveyear swaption

93 94 95 96 97 98 99 00 01 02 03100

150

200

250oneyear/fiveyear swaption

93 94 95 96 97 98 99 00 01 02 03150

200

250

300twoyear/fiveyear swaption

93 94 95 96 97 98 99 00 01 02 03200

250

300

350

400fiveyear/fiveyear swaption

93 94 95 96 97 98 99 00 01 02 030.6

0.8

1

1.2

1.4 Memo: Short Rate Volatility (percentage points)

Figure 3

Actual and Theoretical Swaption Prices*

*Swaption prices (the solid lines) are in US dollars and correspond to options to enter into a fiveyear swap with a notional principal of $10,000.Theoretical prices (the dashed lines) are based on the HoLee model.The lower panel shows the values of the short rate volatility paramenter () that allowed the model to best fit the quoted prices.


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2 3 4 5 6 7 8 9 105.8

5.9

6

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

maturity (years)

percent

ActualImplied by futuresSynthetic

Figure 4Average swap curve (Jan 1994 Mar 2002)


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2 3 4 5 6 7 8 9 104

4.5

5

5.5

6

6.5

maturity (years)

percent

ActualImplied by futuresSynthetic

Figure 5Swap curves (week ending March 22, 2002)


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9495

9697

9899

0001

0203 2

4

6

8

10

50

0

50

maturity (years)

Figure 6: Spread between Actual and Synthetic Swap Rates

Time

basispoints


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95 96 97 98 99 00 01 02

20

10

0

10

20

twoyear rate

95 96 97 98 99 00 01 02

20

10

0

10

20

threeyear rate

95 96 97 98 99 00 01 02

20

10

0

10

20

basis

points

fiveyear rate

95 96 97 98 99 00 01 02

20

10

0

10

20

sevenyear rate

95 96 97 98 99 00 01 02

20

10

0

10

20

tenyear rate

Figure 7

Residuals of Levels Regressions


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counter party credit risk in interest rate swaps during times of market com

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