This note introduces interest-rate swaps, financial contracts wherein two parties agree to exchange interest-rate cash flows, typically in the form of an exchange between fixed-rate payments and floating-rate payments. Interest-rate swaps are valuable risk-management tools for entities seeking to alter the composition of their interest-rate exposure, as swaps enable them to hedge against fluctuations in interest rates. This note covers how these swaps are priced, the understanding of which is essential for effective risk management and corporate financing decision-making.
At the Darden School of Business, this technical note is taught in the first-year “Valuation in Financial Markets” class; it would also be suitable in a module covering interest rates in a derivatives elective course.
