4/20/2015
EXOTIC Interest Rate SWAP
Products
Mortality Projection
Aggarwal, Shivansh
Kapoor, Ridhi
Mittal, Vaibhav
Interest Rate Swaps : An Introduction
• Swaps are not exchange traded instruments. They
are customized contracts traded in the OTC market
• Since Swaps are traded in OTC market, there is
always risk of counterparty defaulting on the swap
• First Interest Rate swap occurred between IBM and
World Bank in 1981
• Despite their youth, swap market exceeded USD 250
trillion by 2006, which is 15 times size of U. S. public
equities market
1
4/20/2015
Plain Vanilla Interest Rate Swap :
Example
• Suppose Party A has taken a floating rate loan, and expects
a fluctuation in Interest Rates. It wants to hedge its risk
exposure from the fluctuations of these rates
• Suppose Party B agrees to make these payments based on
the floating interest rate to Party A and accepts payments
on a fixed interest rate, on the same specified dates for the
same specified time period
These parties then pay the netted amount
Not everything is Vanilla in this world
Coming to exotic products…………
2
4/20/2015
Some Examples
Pension Funds
Insurance Firms
Re Insurerers
VIF(Value in Force) Financing
RE-INSURANCE
FIRM
SHORTFALL AND –VE
BALANCE PAYMENTS
Actuarial Risks Hedged By Re Insurance Firm
COMMISSION
BANK 1
VIF FINANCING
Non Actuarial Risks Collateralized By Insurance Firm
REPAYMENT OF UPFRONT
INSURANCE FIRM
Major Part of the P and L reserved.
3
4/20/2015
Longevity Swap
A Generic Longevity Swap
Majority of the longevity risks transferred
Floating line covering
Pension Benefits
Pension Fund
BANK 1
Re-insurers /
Capital Markets
The Hedge: Fixed line
Payment
The Mortality Projections are used to calculate the fixed line.
References
• www.investopedia.com/terms/i/interestrates
wap.asp
• en.wikipedia.org/wiki/Interest_rate_swap
• lexicon.ft.com/Term?term=longevity-swap
• en.wikipedia.org/wiki/Pension_fund
4
4/20/2015
Questions!
We are sure there would be some :p
Deutsche Bank
20/04/2015 11:00:50
9
2010 DB Blue template
5