Interest Rate Swaps (IRS) assignment: Taking Risk
- Understanding the swap curve: Over the next 11 months, the average maturity is 2%
- What is priced in? July 1, 2020, through May 1, 2021
- Your View vs curve? Q3 2020 floating rate seems high, compared to Q4 and Q1/Q21 of 2021
- Implementation of your view: Deposit $100, select/lock-in 2% maturity date for 1 Jan
- Calculating Risk for a maturity rate of 2% floating, for 1st October:
- Payout: In 3 months if the effective rate is 4% I will pay 2% ($20.00 nominal DAI paid )
- Receive In 3 months if the effective rate is 1% I will get 1% ($10.00 nominal DAI received)
Interest Rate Swaps (IRS) assignment: Eliminating the risk
- Understanding your risk: The risk increases when the is market uncertainty; such as bad news!
- How that risk is priced? The Maturity does not over an option for the 10th of October and so if this really matters that I am able to end my contract by this maturity date the risk increase; subjectively speaking.
- Do you like the risk-return profile — The original plan was to deposit $10,000 USD until 10 October. Unable to lock-in the desired maturity date for 1 Oct vs 10 Oct, and anticipating some negatives news, the return interest rate may be non-realistic of the future returns. I have a 50% / 50% view about the return.
- Deposit AAVE $10K with maturity date 10 October and rate Floating Rate 2%
- **In 5 months if the effective rate is 5% then will Pay 2.5% ($2500 AVVE paid ) **
- In 5 months if the effective rate is 1 % then will Get 1.5% ($1500 AVVE received )