A Primer on Interest Rate Markets and Relative Value – Part 3: Swaps

12 July 2022

Interest rate swaps are one of the largest and most liquid derivative markets. Swaps provide highly flexible solutions to manage risk, speculate on the direction of interest rates and implement relative value (RV) trading strategies.

In this third note in a series of primers, we outline key introductory concepts in swap markets with a focus on relative value (RV) investing. This note builds on two earlier primers:

  • Part 1 outlines general concepts of yield curve risks, relative value analysis of curves and examples of common trading strategies.
  • Part 2 outlines key features of government bond markets for RV investing. 

Our primers assume only a limited background in fixed income. We emphasise the practical elements of markets and RV and deliberately avoid detailed technical descriptions on the mechanics of instruments and risk measurements.

The following areas are covered in this primer:

  • Interest rate swap market background.
  • Swap features and uses.
  • Pricing and risk.
  • Swap forwards and RV.
  • Swap carry and rolldown.
  • RV analysis of swap curves.
  • Basis swaps.
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