Non-Plain Vanilla Interest Rate Swaps

The discussion so far has involved plain vanilla swaps. These have been shown to have the following characteristics  

Each of these characteristics can be altered to meet particular customer demands. The resulting swaps are non-plain vanilla, or nongeneric. 

A wide variety of swap contracts have been traded in the market. Although six-month LIBOR is the most common reference rate for the 

Swaps may also be extendable or putable. In an extendable swap, one of the parties has the right, but not the obligation, to extend the life of the swap beyond the fixed maturity date. In a putable swap, one party has the right to terminate the swap ahead of the specified maturity date. The fixed rate would be adjusted to reflect the cost of the implicit option. For example, if the fixed payer has the right to extend the swap, the fixed rate would be higher than for a plain vanilla swap with similar terms. 

A forward-start swap s effective date is a considerable period—say, six months—after the trade date, rather than the usual one or two days. A forward start is used when one counterparty, perhaps foreseeing a rise in interest rates, wants to fix the cost of a future hedge or a borrowing now. The swap rate is calculated in the same way as for a vanilla swap. 

A wide variety of swap contracts have been traded in the market. Although six-month LIBOR is the most common reference rate for the floating-leg of a swap making semiannual payments, for example, three-month LIBOR also has been used, as well as the prime rate (for dollar swaps), the one-month commercial paper rate, the Treasury bill rate, the municipal bond rate (again, for dollar swaps), and others. 

---