Compounding and real interest rates, forward rate agreements, interest rate swap cash flows and valuation, DV01, hedging a loan, and cross-currency swaps.
For: advanced learners who want to understand institutional interest rate tools (take "Bonds & Fixed Income" first)
This course uses ideas from the courses below (optional; you can start right away).
An interest rate is the "price of money". Compounding makes time your most powerful force, and central banks influence everything through the policy rate.
Lock in today the rate you'll borrow at 6 months from now. If rates rise, the FRA makes up the difference.
One side pays a fixed rate and the other pays a floating rate, and they exchange only the net interest. Watch the cash flows go back and forth along the timeline.
Once rates move after signing, the swap's value changes. Drag the rate and see whether the payer or the receiver comes out ahead.
A company has a floating-rate loan and fears rising rates? Add a "pay fixed, receive floating" swap and the cost is locked in as fixed.
One company has dollars and needs euros; another is the opposite. A cross-currency swap lets them exchange principal and interest, then swap back at maturity.
Your savings earn 2% and prices rise 4%: do you have more money or less? Tell nominal from real interest rates to see what a rate truly means.
If rates move just 0.01%, how much does your swap or bond gain or lose? DV01 turns interest rate risk into money, and it tells you how much notional to use when hedging.