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Range accrual swap A range accrual swap is similar to an interest rate swap, where the interest rate paid by the first leg to the other party is either a fixed or floating interest rate. The main difference is in how the coupon of the second leg is determined. Unlike a regular swap where the floating rate is compared to the defined strike on a single fixing date in every payment period, in a range accrual swap the coupon (which can be either a fixed coupon or a floating coupon) is conditional on some event happening. That is, on how many days an observation rate (usually the LIBOR index) is within a predefined range, set using an upper and a lower barrier. The observation rate is typically monitored on a daily basis within the coupon period, but it can also be monitored weekly or monthly. Accordingly, for each day the 3M LIBOR fixes within the predefined range, one day of interest at the predefined coupon rate is accrued. If the observation rate fixes within the predefined range every day of the monitoring (or accrual) period, then 100% of the coupon is paid out. Note The range can remain the same throughout the life of the swap, or it can be changed according to a preset schedule. For example for a 2-year swap it can be 0-3.7% for the first year, and 1-3.7% for the second year. Note You can set a different barrier range for each coupon period. How is the interest rate paid by the second leg calculated? The interest rate paid by the second leg on each payment date is calculated as follows: n/N * interest rate * notional Where:
y n is the number of fixings in the payment period that the observation rate (e.g., 3-month USD
LIBOR) lies within a specified range.
y "N" is the total number of fixing days in the payment period. y "Interest rate" is either a fixed rate or a reference rate.
Note If the interest rate used here is a floating rate, if the first leg is also paying a floating rate it will have to include a floating spread (this is to ensure a preferable interest rate). Total return swap A total return swap is an agreement where the two counterparties swap periodic payments over the life of the agreement. The buyer makes fixed or floating payments (as in a vanilla interest rate swap); the seller makes payments based on the total return (coupons plus capital gains or losses) of a predefined reference asset. Both parties' payments are based upon the same notional amount. The reference asset can be almost any asset, index or basket of assets. In effect, the buyer is buying protection against a loss in the asset's value, and the seller is gaining the benefit of owning an asset without having to put it on its balance sheet.
Asian Option What is an Asian option? An Asian option is a cash-settled option whose payout is determined by the average value of the underlying asset on a predetermined set of dates (known as fixings) over the life of the option rather than by the actual value of the underlying asset at expiration (as is used for a Vanilla).
The average of the underlying is calculated by taking the underlying on a specific series of dates (or fixings). When determining the fixings, you can also edit the weighting assigned to each date. By default, all dates chosen carry the same weight, that is, 1. If the average rate is better than the strike, the option is in the money and it is cash settled. That is, the settlement is made in cash as opposed to physical delivery of the underlying asset. The underlying asset for an Asian options is a swap; for an Asian strip it is a swap strip.
y y