Fixed-rate buyers

The majority of issues since 1995 have come with floating-rate notes. However, in the latter part of 2000, demand for the asset class was expressed by fixed-rate buyers and MBNA EBL issued two fixed-rate transactions, one euro- and one sterling-denominated. Both issues had 10-year maturities and capitalised on the relatively small supply of consumer asset securitisations available in that sector of the curve. Exhibit 13.4 shows issuers of European CCABS ranked by cumulative issuance. 

The buyer of this swaption has the right, one year from now, to enter into a 3-year swap as the fixed-rate payer, paying 4% p.a. against receiving 3-month EURIBOR, on a notional principal of 10 million. If 3-year swap rates on 29 March 20X4 were, say, 4.5%, it would be worthwhile for the owner to exercise the swaption, paying a fixed rate of only 4% when the market rate was 4.5%. 

An example would be that a protection buyer holding a fixed-rate risky bond and wishes to hedge the credit risk of this position via a credit default swap. However, by means of an asset swap the protection seller (e.g., a bank) will agree to pay the protection buyer LIBOR +/-spread in return for the cash flows of the risky bond. In this way the protection buyer (investor) may be able to explicitly finance the credit default swap premium from the asset swap spread income if there is a negative basis between them. If the asset swap was terminated, it is common for the buyer of the asset swap package to take the unwind cost of the interest rate swap. 

The paper [51] considers the agency effect and provides an example where supplier and buyer coordination affect set-up cost at the supplier. The buyer requires a product from the supplier at a fixed rate D per unit time. Demand is met from finished-goods inventory maintained by the supplier. Shortages are not allowed. Production is assumed to be instantaneous, but there is a production set-up cost and an inventory-holding cost, both incurred by the supplier. 

A bank or corporation may buy or sell an option on a swap, known as a swaption. The buyer of a swaption has the right, but not the obligation, to transact an interest rate swap during the life of the option. An option on a swap where the buyer is the fixed-rate payer is termed a call swaption one where the buyer becomes the floating-rate payer is aswaption. The writer of the swaption becomes the buyers counterparty in underlying the transaction. 

The one-off payment reflects the difference between the prevailing market rate and the fixed rate. If the market rate was above 40 basis points at the time of this trade, the protection buyer would pay the protection seller the one-off payment reflecting this difference. 

The EURIBOR futures contract provides the buyer with the theoretical commitment to place 1 million on deposit at a fixed interest rate for a nominal 90-day period starting on the futures expiry date, the third Wednesday of the delivery month. The fixed interest rate is not quoted directly, but is defined as 100 minus the quoted futures price. So if an investor buys a future at a price of 97, he or she is theoretically committed to deposit 1 million at 3% for 90 days. We have twice used the word theoretically because, in practice, these futures contracts are always cash settled, which means that buyers and sellers effectively pay or receive the difference between ... 

Swaptions are options that allow the buyer to obtain at a future time one position in a swap contract. It is quite elementary that an interest rate swap, fixed for floating, can be understood as a portfolio of bonds.To consider this assume that the notional principal is 1. Then the claim on the fixed payments is the same as a bond paying coupons with the rate p and no principal. Let X be the time when the swap is conceived. The claim on the fixed income stream is worth, at time X,... 

Chakravarty and Martin [29] consider a related problem that allows for demand to decay exponentially with time, where the function has a known and constant rate of decay. Production by the seller and ordering by the buyer incur a fixed set-up charge, but holding cost is not considered in the model the... 

---