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How to Enter Callable Swaps

Monday, March 08, 2010

• 1. Single Callable Swap
• 2. Multi Callable Swap
• 3. Case Study

1. Single Callable Swap

Single Callable Swap = Payer swap + Sell European swaption

Example

Pay 3% versus receive 6M GBP Libor (10 years).
Counterparty has right to cancel the swap in 2015.

Parameters

1. Swap start date
2. Call date
3. Swap end date
4. Swap rate (strike)
5. Right owner (sell – counterparty has right to call)
6. Volatility (0% - default market data)
7. Price (NPV)

Screen Shot – Payer Swap

Screen Shot – European Swaption

Single Callable Swap pricing

Payer swap price + European swaption price

2. Multi Callable Swap

Product definition

Multi  Callable Swap = Payer swap + Sell Bermudan swaption

Example

Pay 1.8% versus receive 6M GBP Libor (10 years).
Counterparty has right to cancel the swap at every payment date.

Parameters

1. Swap start date
2. First call date
3. Last call date
4. Swap end date
5. Swap rate (strike)
6. Right owner (sell – counterparty has right to call)
7. Volatility (0% - default market data)
8. Call frequency
9. Price (NPV) *

* Bermudan swaption can be priced also by Report > “Bermudan Swaption Report” and see the call probabilities.

Screen Shot – Payer Swap

Screen Shot – Bermudan Swaption

Multi Callable Swap pricing

Payer swap price + Bermudan swaption price

3. Case Study

The following portfolio was created in response to a live client situation:

1. Start date is 31.03.2011
2. End date is 31.03.2019
3. European (call 27.03.2015)
4. Notional amount GBP 4,250,900
5. 8 yr nc 4
6. Total length of trade is 8 yrs
7. Fixed rate is 4.85%
8. Amortizes at GBP 50,000 semi-annually
9. Semi-annually rolls

What is the NPV?

Viewing the Deal

To view this example please select Add... > Use Example Deals / Portfolios. 

This will open a pop-up which allows you to browse by asset class or portfolio type.

Click on Sample Portfolios > Public Templates and select Single Callable Swap (case study).

Doing so will automatically save it to your portfolios in the Portfolios section.

Viewing the NPV

Having activated the portfolio now go to the Deal View drop-down menu and select NPV (interest)/Scenario.

Doing so will give you the NPV on the transaction under the 7 potential market scenarios contained in sals.a®.

Correlation

The valuation created by sals.a® was cross referenced with results from a leading information provider.