Swaps: Plain and Fanciful

  • Author(s): ROBERT H. LITZENBERGER
  • Published: Apr 30, 2012
  • Pages: 831-851
  • DOI: 10.1111/j.1540-6261.1992.tb03996.x

ABSTRACT

The outstanding face amount of plain vanilla interest rate swaps exceeds two trillion dollars. While pricing and hedging of such swaps appear to be quite simple, many existing theories are based on the incorrect characterization of a swap as a simple exchange of a fixed for a floating rate note. This characterization is not consistent with standarized swap contracts and the treatment of swaps in bankruptcy. This paper provides an alternative perspective on swaps.

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