Understanding and Modelling Swap Spreads

10 Pages Posted: 26 Apr 2005

See all articles by Fabio Cortes

Fabio Cortes

Bank of England - Foreign Exchange Division

Abstract

Interest rate swap agreements were developed for the transfer of interest rate risk. Volumes have grown rapidly in recent years and now the swap market not only fulfils this purpose, but is also used to extract information about market expectations and to provide benchmark rates against which to compare returns on fixed-income securities such as corporate and government bonds. This article explains what swaps are; what information might be extracted from them; and what appear to have been the main drivers of swap spreads in recent years. Some quantitative relationships are explored using ten-year swap spreads in the United States and the United Kingdom as examples.

Suggested Citation

Cortes, Fabio, Understanding and Modelling Swap Spreads. Bank of England Quarterly Bulletin, Winter 2003, Available at SSRN: https://ssrn.com/abstract=706830

Fabio Cortes (Contact Author)

Bank of England - Foreign Exchange Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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