Fixed Interest Player v/s Floating Interest Player: Tug of War

Abstract

Swaps have been one of the most widely used derivatives since 1970s and for good reasons. Interest rate swap is a mutual agreement between two parties to pay each other the differential amount of up and above the fixed v/s LIBOR. This paper tries to answer the long standing question of what should have been the range around which the fixed rate should have hovered with respect to fluctuating LIBOR over the years to attain break-even and not to be worse off. This paper analyses for the difference in the average LIBOR of various periods (1 month, 3 months, 6 months and 12 months) with respect to different maturity dates (5 years, 10 years, 15 years, 20 years and 23 years). It looks for the presence of structural change in the trend of LIBOR beginning from 1990 to 2013. This paper will draw the attraction of academic as well as market participants. Fixed rate player refers to the party which agrees to pay the existing floating rate (LIBOR) in the market in exchange of an agreed upon fixed rate from the counter party and vice-versa .