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The pricing and valuation of swaps

The European Journal of Applied Economics - opened book
Author: Jelena Paunović

Received: January 23, 2013

Correction: February 25, 2013

Accepted: March 08, 2013




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Keywords: swaps, financial derivatives, OTC market, hedging, risk, speculation, financial markets.

Abstract: Swaps are financial agreements between two parties to exchange period cash flows and are mostly used as a tool for hedging risk and speculation. They are derivative contracts that derive their value from an underlying asset (the most common underlying assets are the interest rates in the plain vanilla case, but it can be almost anything). These OTC products (over the counter) are traded directly between the two parties or with a financial institution acting as an intermediary. Some banks in Serbia already offer these derivative instruments, but the markets are still in an emerging phase. The private sector is severely affected by credit and interest rate risk which currently lacks sufficient knowledge and understanding of such products and their importance. This paper aims to present and demystify the structure of these financial derivatives by presenting their valuation methods and by showing how they are used in practice. Ultimately, we shall discuss the credit risk the counterparties are facing in developed financial markets nowadays.

APA format
Paunović, J. (2013). The pricing and valuation of swaps. Singidunum Journal of Applied Sciences, 10(1), 37-45. doi:10.5937/sjas1301039P


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