Interest Rate and Cross Currency Swaps
If you need to get up to speed on Interest Rate Swaps (IRS), Cross Currency Swaps MTM and valuation models, here is a short and sweet lesson plan that will get you there.
Starting off with the basics of forward pricing we review how to build projected zero and forward yield curves and then apply that knowledge in calculating the MTM for both interest rate swaps and cross currency swaps. Lesson number three is a sample final exam solved by my MBA students while lessons four and five present the solution for the sample exam.
While I can try and teach swaps pricing and MTM till I am blue in the face, the only way to learn this topic is to solve the exam and build the excel spreadsheet yourself. If you need to be comfortable with the topic for an investment banking or sales and trading interview go forth and build. If you just need to be familiar a simple reading may suffice.
While you may not need it but we also introduce the concept of value at risk for interest rate and cross currency swaps using the historical simulation method. This is an advance topic that would be of use if you need to get comfortable with Pre-Settlement Risk limits (PSR limits) as well as Potential Future exposure (PFE) calculations.
Finally the old LIBOR based pricing models are increasingly being questioned. You need to understand how the OIS curve works which is covered in the final lesson.