Chapter 14

All costs of a swap, which are interest expense, transaction cost, and service charges.

David Ricardo used the notion of comparative advantage to justify international trade. Specifically, if countries specialize production in those industries where they can produce goods and services more efficiently (in relative terms) than other countries, and engage in trade, all countries will be better off.

One of the two parties involved in financial contracts who agrees to exchange cash flows on particular terms.

One counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counterparty that are denominated in another currency.

A market is complete if each state of the economy is matched by security payoff.

A reference amount of principal used for determining payments under various derivative contracts.

The difference between the fixed interest rate spread differential and the floating interest rate spread differential of the debt of two counterparties of different creditworthiness. A positive ___ is a necessary condition for an interest swap to occur that ensures that the swap will be beneficial to both parties.

There are many variants; however, all involve swapping interest payments on debt obligations that are denominated in the same currency.

A generic term to describe a financial institution that facilitates currency and interest rate swaps between counterparties.

Function of a swap bank in which it matches counterparties but does not assume any risk of the swap; however, it does receive a commission for this service.

Function of a swap bank in which it makes a market in one or the other side of a currency or interest rate swap.