en     ru     jp
 
 
private banking
private banking
private banking
private banking
private banking
private banking
private banking
     
 
Home
      
Knowledge Base
      
Equity Derivatives and Structured Products Glossary
      
Index amortising swap (Ias)
       
 
Back

Index amortising swap (Ias)

 Search definitions     
  Search  

Index amortising swap (Ias)
An Interest rate Swap whose principal amortises on the back of movements in an index, such as Libor or constant maturity Treasuries. The fixed-rate receiver effectively grants an Option to the fixed-rate payer to amortise the Swap. The Option is triggered by Interest rate movements after an initial lock-out period. The notional principal amortises as rates fall or remains constant if rates remain the same. In return for granting the Option, the fixed-rate receiver gets a Yield above current fixed rates. IAS have been widely used by US regional banks in their asset/liability management activities. By using IAS, banks were able to obtain the negative Convexity of a Mortgage-backed security and avoid the Risk of excessive prepayments due to changes in consumer sentiment. But the fixed receiver is exposed to both falling and rising rates. If rates fall, there is the possibility at each Interest date that some or all of the Swap Will be terminated, creating a Reinvestment risk. If rates rise, the Swap may run to maturity, providing meagre income while floating rates soar. An IAS fixed-rate receiver is selling Volatility to the payer for an enhanced Yield. So the lower the Volatility of the index, the lower the Option value and Yield pick-up. A subsequent fall in Volatility benefits the receiver because the likelihood that the Swap Will amortise decreases. IAS can be structured with negative or positive Convexity and the amortisation schedules and lock-out periods can be changed in order to increase or decrease yields. Also known as an Indexed principal Swap.

See also mortgage Swap
Posted by  Privatebanking.com
 
  Back  
  Print  
  Email  

 

private banking
Get Adobe Flash Player to view the media
FlashPlayer required to view the media
private banking
private banking
private banking
private banking
private banking

 
Home News Library Newsletters Event Calendar Advertise About Contact FAQ
Privacy Policy     Terms of Service
 

©