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Explain how a plain vanilla interest rate swap is constructed. Analyse the comparative advantage argument for the...

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Finance

Explain how a plain vanilla interest rate swap isconstructed.

Analyse the comparative advantage argument for the popularity ofswaps. Support your analysis with a numerical example.

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Swap is a private agreement betweentwo parties to exchange future cash flows from an agreed asset Inother words it is a series of forward contracts with the agreementto exchange payments on specified datePlain vanilla InterestRate SwapExchange of interest paymentexample fixed vs floating on a notional principal at apreagreed date Typically net interest is paid by the party thatowes it at the settlement dateThe most common interest rate swapis one where one counterparty A pays a fixed rate the swap rateto counterparty B while receiving a floating rate indexed to areference rate such as LIBOR or EURIBOR By market conventionthe counterparty paying the fixed rate is called the payer whilereceiving the floating rate and the counterparty    See Answer
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Explain how a plain vanilla interest rate swap isconstructed.Analyse the comparative advantage argument for the popularity ofswaps. Support your analysis with a numerical example.

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