50%. 73%, thus a total interest rate at closing of 4. To illustrate how interest rate swaps can be used to manage interest rate risk, suppose that an institution has floating-rate liabilities (debt), and that it pays 5 basis points over a reference rate such as three-month Libor, but has fixed-rate paying assets. Research Notes Oct 2, 2023 Research. the Inflation Swap Market 1. Treasury yields and swap rates, including the benchmark 10-year U. 5%. Company XYZ has a $1 million loan with a floating rate, but it would prefer the predictability of a fixed rate. S. Last 10 Years 2. S. The swap market (interest rate and currency swaps only) has grown to $434 trillion as of June 30, 2010. An alternative method focuses on addressing cyclical dependencies – primarily through interest rate swaps and, in particular, basis swaps. The interest rate swap is a technique for hedging risk of unfavorable interest rate fluctuations. Use of interest rate swaps by a corporate borrower to synthetically convert floating-rate debt securities to fixed-rate debt securities (or vice versa). I think there exists the cash formula, but this suggests a. For example, one of the largest markets is for interest rate swaps. 2. Assume the BBSW curve is as presented here:. fixed interest payable on notional principal at 7% floating interest receivable on notional principal at LIBOR plus 5% XYZ Ltd has hedged this interest rate exposure by entering into an interest rate swap. Then, they will enter into a mutual agreement to. 488. Assume a notional principal of $1 million. 0)Interest rate swaps grease the wheels of traditional finance. LCH. We believe that it would be a desirable property 1 Some models such as Ang and Piazzesi feature static fac-tors, while models with dynamic factors and macroeco-ABC Corp. At the time of the swap agreement, the total value of. The swap thus synthetically converts fixed rate assets to variable rate assets. Company ABC has a $1 million loan with a fixed interest rate, but because the company has predicted a drop in interest rates, it wants to switch to a floating rate. Accordingly, your CRE loan is likely to come with a floating rate, consisting of a spread — perhaps 2. Its return on investment is LIBOR - 0. 1. Also known as interest rate protection agreements, swaps emerged as large banks, which do most of their lending on a floating rate basis (as opposed to fixed), began using swaps to leverage their fixed-rate borrowing capacity and obtain lower-cast. Basics of an Interest Rate Swap The payments on an interest rate swap are a function of the (1) notional principal amount, (2) interest rates, and (3) the time Figure 1 – Swap Process 1) Plain Vanilla Swaps . For interest rate products, a 3-month SOFR rate, for example, will be derived by compounding the overnight rate in arrears. methodology for interest rates swap curves looks at the fact that certain swap rates ten - or points bear a close relationship to their corresponding government yield tenor. Cash $325. 27 = $99,726. In a basis swap, both streams are floating rates of interest. An interest rate swap is a financial contract between two parties who agree to exchange interest rate cash flows based on a notional amount. As seen in Figure 1, a bank and a company enter into an interest rate swap agreement on December 31, 2016, for a notional amount of $1. Since they were introduced in the early 1980s as a financial innovation—the World Bank was credited with pioneering the swap contract in 1981—swaps have grown into aToday, most interest rate hedging uses a financial product known as an interest rate swap. There are many different types of interest rate swap contracts, but in real. 5% semi-annually. and HOUSTON, Oct. Company enters into a swap where it receives LIBOR and pays fixed rate: buys a 5 year swap at 3. 64%) BancorpSouth Disburses Nearly $55K in Homeowner Aid Business Wire - Wed Aug 11, 2021. Swaps are derivative contracts and trade over-the-counter. The Interest Rate Swap Market The interest rate swap market is one of the most important fixed-income markets for the trading and hedging of interest rate risk. A swap contract is a derivative allowing the exchange of cash flows from each party's underlying asset. 91B. 001% and the median ratio 3Another reason for the discrepancy is that there is a very large notional amount of short-term swaps, which have particularly low exposure to interest rates. An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. e. An Interest Rate Swap is an agreement to exchange fixed and floating interest rates which are calculated upon the specified principal with the net amount of interest payment of the two parties to be settled on the delivery date. The swap typically involves one party making fixed payments and. Swaps are derivative contracts and trade over-the-counter. 1 trillion of interest rate swaps2. An interest rate swap is an interest rate derivative product that trades over the counter (OTC). Let's say that we've got company A over here, and it takes out a $1 million loan, and it pays a variable interest rate on that loan. Understanding Basis Rate Swaps Definition. The term sheet states that the borrower will be required to swap the floating rate to a fixed rate of interest and that the current all-in rate would be 4. Receive: BBSW semi-annually. The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, which exchange fixed-rate payments for floating. The annualized fixed rates were 0. g. 80% = 2. Now assume that SONIA rises by 2% to 5%. The basis swaps are used to hedge the interest rate. Swaps are derivative contracts and trade over-the-counter. North-Holland Interest rate swaps An empirical investigation Tong-sheng Sun, Suresh Sundaresan, and Ching Wang* Columbia UnirersitY, New York, NY 10027, USA Received November 1991, final version received December 1992 Using quotations from two interest rate swap dealers with. - Interest rate swaps are priced so that on the trade date, both sides of the transaction have equivalent NPVs. Courses on Khan Academy are always 100% free. An interest rate swap is an agreement where two entities swap their interest payments. Swaps are derivative contracts and trade over-the-counter. Upon the completion of the merger, BancorpSouth was renamed Cadence Bank. S. issued debt. One party pays a fixed rate, while the other pays a floating rate tied to a reference rate (e. The valuation of an interest rate swap in a world of XVA is particularly important because credit risk is bilateral on this type of derivative contract, unlike the unilateral credit risk on a debt security or an interest rate cap or floor. We find that the average bank has a large notional amount of swaps-- $434 billion,Interest Rate Swap dapat disesuaikan untuk memenuhi kebutuhan mata uang dan risiko suku bunga. 25% (0. Co B is now effectively paying a fixed interest rate of 9. The evidence from four major currencies – $, £, DM and ¥ – during 1987–1996 suggests that swaps were initially being priced off the futures curve (ignoring the convexity. 785 = 2. An interest rate swap is a two-party agreement by and between you and a Swap Dealer to exchange payments based on periodic changes in interest rates or indices on the dates and for the term specified in the swap agreement. Many companies opt for a swap to exchange a variable rate for the simplicity of a fixed-rate payment. The profit rate swap seeks to achieve Sharia-compliance by using reciprocal murabaha transactions: commercial arrangements long accepted by Sharia scholars. Interest Rate Swap. 3. The swap bank approached Co B and agreed to receive fixed at 8. You can use this tip to check whether your resulting swap rate is close to the last spot rate. . 25%–0. 04% for 6 months, 1. Time USD Euro (years) Cash flow Euro Cash flow 0 − 5, 000 + 4, 000 1 + 150 − 100 2 + 150 − 100 3 + 150 − 100. 2. Journal of Financial Economics 34 (1993) 77-99. Video transcript. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk (and term. Friday, April 10, 2020. The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, which exchange fixed-rate payments for floating. , X% per annum) and floating/variable interest rates (like LIBOR). 96 actually means annual interest rate of 1. The remaining USD LIBOR settings. The member should be. How to account for the credit spread ( e. Libor Rates are available Here Interest Rate Swaps Example. Interest rate swaps are financial instruments that allow parties to exchange interest rate cash flows. Term: 3 years. An interest rate swap (IRS) is a type of a derivative contract through which two counterparties agree to exchange one stream of future interest payments for another,. " 4 A specified index includes an index that is based upon "objective financial information," 5 which is separately. SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is modifying its existing interest rate swap clearing requirement regulations under applicable provisions of the Commodity Exchange Act. To this end, we use regulatory data on individual swap positions for the largest 250 U. Example DH 11-1 illustrates the application of. The floating interest rate is always fixed for each partial period based on a benchmark rate (PRIBOR, EURIBOR, LIBOR, etc. 17 January 2010 by Tejvan Pettinger. This is the rate at which the party will pay the other party. The parties involved are called counterparties. B pays A six-month T bill rate + 2% floating 3. With back-to-back swaps, the bank enters into two separate transactions with their customer: These transactions create an all-in fixed-rate structure. The benchmark rate reform led to structural changes in OTC interest rate derivatives markets, driving up the share of instruments referencing overnight rates in overall turnover. The higher that number of basis points, the higher the swap fee. 101686. 89, while the broader NSE index NIFTY gained 30 points, or 0. A rate swap does not renegotiate your existing loan, rather, it is a separate transaction that leverages a bank’s borrowing power to stabilize your rate. 16%, to 66,125. Should You Buy or Sell BancorpSouth Bank Stock? Get The Latest BXS Stock Analysis, Price Target, Dividend Info, Headlines, Short Interest at MarketBeat. Interest-Rate Swaps (continued) Interpreting a Swap Position To understand why a swap can also be interpreted as a package of cash market instruments, consider an investor who enters into the following transaction: o Buy $50 million par of a five-year floating-rate bond that pays six-month LIBOR every six months; finance the. compared to interest rate swaps denominated in other currencies. 00% PAID to Bank = 5m x 91 x 7. S. The fixed rate is the predetermined interest. Swaps are derivative contracts and trade over-the-counter. Trade rates represent shown switch one mid-market basis additionally may not reflect. Interest rates swaps are a way for financial bodies to exchange risk on the movement of interest rates. The bank is the receiver and pays 3-month LIBOR plus a spread of 1. Its NPV on. 33 = 0. In fact, banks with fragile funding, like high concentrations of uninsured deposits, sold or reduced their hedges in 2022 as interest rates climbed, according to a new paper. They are an important tool for managing interest rate risk and can be used to lower borrowing costs or increase investment returns. This paper examines the convexity bias, caused by the non-linearity of payoffs, in the pricing of interest rate swaps off the Eurocurrency futures curve. Today's value and price history. The notional principal. Generally, the two parties in an interest rate swap are trading a fixed-rate and variable-interest rate. Dollar (US$) interest rate swap spreads from 1994 to 2004 and presents an econometric model based on this analysis. See full list on investopedia. S. Swapping allows companies to revise their debt conditions to take advantage of. Quality Spread Differential - QSD: In an interest rate swap , the difference between the interest rates of debt obligations offered by two parties of different creditworthiness that engage in the. A Basis swap is a broad category of swaps where you exchange one floating rate against another floating rate. Through the first nine months of the year, the company entered into and extended swaps on $2. This short interest tracker provides a variety of short interest related data, sourced from a variety of partners. This short interest tracker provides a variety of short interest related data, sourced from a variety of partners. Dutch pension funds are plowing cash into long-dated swap contracts, according to strategists, upending one of this year’s most popular. Use of VIX futures and inflation swaps by a firm’s market strategist to infer expectations about market volatility and inflation rates, respectively. Plain vanilla interest rate swaps are the most common swap instrument. 7% on 2021 volumes (+$533bn). S. , LIBOR). Paragraphs 68 - 70, 114 and 132 of Statement 133 set forth the requirements and guidance concerning use of the shortcut method to account for fair value or cash. Hence, this curve is used for pricing and valuation of interest rate derivatives. There are 100 basis points in one percentage point. Depending on the swap, cashflows may be based on an interest rate, index, commodity, or currency exchange rate. dollar interest rate swaps outstanding as of the end of 1991 was just over $1. Let’s see how an interest rate swap works with this basic example. Swaps are derivative contracts and trade over-the-counter. In a plain vanilla interest rate swap, two parties agree to exchan. Interest rate swaps typically involve an exchange of payments calculated based upon fixed and floating rates. Interest rate swaps are independent from the underlying debt (or assets) that they are intended to hedge. The swaption data is at daily frequency, with 19 different underlying swap tenors, ranging from 1-month to 30-year, and 25 different expirations, ranging from 1-week to 30-year. It represents the mid-price for interest rate swaps (the fixed leg), at particular times of the day, in three major currencies (EUR, GBP and USD) and in tenors ranging from 1 year to 30 years. dollar interest rate swaps comprise about one -half of all interest rate swaps outstanding: the notional principal amount of U. Interest rate swaps are commonly used for. We compare interest rate swaps based on two different reference rates. 5 trillion, compared to almost $3. 50%. The first reference rate’s maturity, \ (\Delta\), matches the payment interval of the floating rate loan. 29, 2021 / PRNewswire / -- Cadence Bank (NYSE: CADE) today announced the successful closing of its previously. The most common interest rate swap arrangement is when Party A agrees to make payments to Party B on a fixed interest rate, and Party B pays Party A on a floating interest rate. Let’s say Mr. An interest rate swap is a product that provides real benefits to both parties and is often the most elegant solution to meet the bank’s and the borrower’s needs. By spreading out a two-year liability over five years, a borrower pays out less cash each period even though the total term of the liability increases. The market cap of a. This swaps the overall interest rate profile from a floating rate to a fixed rate. 91B. Basis Rate Swap: A basis rate swap is a type of swap in which two parties swap variable interest rates based on different money markets , and this is usually done to limit interest-rate risk that. 15 USD. The increase in interest paid has been almost exactly offset by the increase in interest received. 3. Interest rate swap contacts are the most popular; typically, the swap is exchanging fixed and variable interest rates. 96%. dealer’s pricing and sales con ventions, the relevant indices needed to determine pric ing, formulas for and examples of pricing, and a review of variables that have an affect on market and termination pricing of an existing swap. An interest rate swap is an agreement to exchange one stream of interest payments for another, based on a specified principal amount, over a specified period of time. The shortcut method may be applied to a hedging relationship that involves the use of an interest rate swap-in-arrears provided all of the applicable conditions in paragraph 68 are met. swap DV01– their interest rate risk exposure in swaps– to bank equity– their capacity to absorb risk. An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. A common response from a banker is, “We don’t lend at Prime–0. While BMA index swaps in contrast to LIBOR would reduce basis risk, since the variable-rate paid on the bonds would be the same index paid by the counterparty in a. The final step to calculate a fair value for our complete swap is to present value each floating coupon. 75% range on a 5/25. Since interest payments are based on the principal amount, generally, interest swaps involve the exchange of a fixed interest rate for a floating interest rate. Interest Rate Swaps shows that valuation, pricing, and portfolio management of swaps likewise follow the most basic principles of finance. Interest rate swaps are the most common form of swap. 88 Valuation of Currency Swaps in Finance. *. For an interest rate swap, there are two. These swaps help manage interest rate risk, hedge against rate fluctuations, and enable. The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, which exchange fixed-rate payments for floating. The annualized fixed rate is 7. BlazeXShiba conversion to US Dollar is 1 BXS = 0. Hammersmith and Fulham, where the genesis of the local authorities swaps litigation began. Par Swap Rate. SBM pays a fixed rate on the swap and receives a floating rate5. (2021) report that the average U. Among the Interest rate swaps, the OIS is the most popular and liquid. Similarly, we can say that an interest rate swap with two floating rates is a basis swap. Likewise, financial firms. S. This environment created a market for the. Someone using the then-newly minted interest rate derivatives definitions back in 2006 would only have needed to read 158 pages of the main book to get a clear picture of the terms of their trades. Start Preamble Start Printed Page 52182 AGENCY: Commodity Futures Trading Commission. Net cost = $16,800. 9 percent, the amount of the swap spread is 0. The total notional amount of interest rate and currency swaps (eliminating double counting) has grown from essentially zero in 1980 to US$9. On Thursday, the Bank of England is broadly expected to deliver a 0. TUPELO, Miss. , LIBOR). Following aggressive Bank of England rate rise, swaps markets predict borrowing costs will hit 6. Since the late 1970s, interest rate swaps have been used as a mechanism for managing risk. The swap rate is the agreed-upon fixed rate for a swap set by the participants to the agreement. At contract initiation, the fixed rate equates the cash flows from the fixed and floating legs over the contract’s maturity, resulting in a net cash flow of zero. S. General description Graphical depiction of IRS cashflows between two counterparties based on a notional amount of EUR100mm for a single (i'th) period exchange, where the. This paper uses the conventional interest rate swap contract—a contract between two parties to exchange a fixed. 96% Annual fixed rate = 0. ACTION: Final rule. Nominal or principal amount. swap DV01– their interest rate risk exposure in swaps– to bank equity– their capacity to 3 Another reason for the discrepancy is that there is a very large notional amount of short-term swaps, which have particularly low exposure to interest rates. It’s the interest fee, which is charged or earned, for keeping positions open overnight. The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, which exchange fixed-rate payments for floating. What are the types of swaps? Interest rate swaps. While the interest rate is fixed, the amount of interest paid is variable and is determined by the market exchange rate. designed to hedge the interest rate risk of SBM’s $1 billion five-year floating rate revolving credit facility. 91%] UNDER the RBNZ's May MPS projection of 3. They involve a fixed rate payer and a floating rate payer, exchanging interest payments according to the terms of the contract. The Currency. 16. Swaps also help companies hedge against interest rate exposure by reducing the uncertainty of future cash flows. The Borrower is not required to enter into such agreement with the Lender. Variable interest rate borrowers would use Swaps to hedge their interest costs in a market where variable interest rates are expected to rise while fixed rate borrowers would use a Swap to take advantage of lower interest rates. 162 as a trade or business expense, as opposed to being deductible under Sec. Interest rate swaps are financial instruments that allow parties to exchange interest rate cash flows. 5 trillion, compared to almost $3. At the time of the swap agreement, the entire fixed rate flow remains equal to the forecasted floating-rate payment as depicted by the forward MIBOR curve. 66% of MXN swaps are executed on-SEF, but there is almost no Dealer-to-Client activity on-SEF. bank has an asset duration of around 3. By entering into a fixed-for-floating swap with a bank, the company can effectively set a fixed rate on its loan. 2% 2. An interest rate swap is an agreement between two parties to exchange future interest rate payments over a set period of time. 60% to 3. The swap bank makes a healthy 0. " The Notice states that income from swap payments will be sourced by reference to the residence of the recipient of the swap income, except that all. One of the primary functions of swaps is the hedging of risks. Usually, both. Both legs of a basis swap are floating but derived from. . For example, the customer borrows at 1-month Term SOFR or Prime, but because of the swap, effectively pays a fixed-rate on the loan. 5. So, if one party is paying a fixed interest rate to the bank and the other is paying a floating interest rate, but each party prefers the other’s loan arrangement over their own. Should interest rates rise, it will be paying out more via its floating debtBut a typical, physical delivery, fix v fix or fix v float, cross-currency swap can be viewed as a combination of two interest rate swap legs. Get live price now! ICE Swap Rate, formerly known as ISDAFIX, is recognised as the principal global benchmark for swap rates and spreads for interest rate swaps. S. The reform reduced hedging needs for Libor-related risks, which led to a material drop in FRA trading and a shift in the geographical distribution of OTC turnover. In addition, there is an increasing use of the interest rate swap as a tool for asset and liability matching. Interest Rate Swap Types The following are three kinds of interest rate swaps. Semi-Annual payments; Start Date = Today, Maturity Date = In 1 year,(Graph 1, centre and right-hand panels). 869. Interest rate swaps are one of the most common type of. HOW TO INVEST IN INTEREST RATES SWAPS? Interest rate swaps became an essential tool for many types of investors, as well as corporate treasurers, risk managers and 2 Understanding Interest Rate Swaps U. trading activity, repo volume, and the swap spread. Swap: A swap is a derivative contract through which two parties exchange financial instruments. , mostly for 1M, 3M, 6M). Our basis points calculator explains more details. The bank then executes an offsetting swap with a swap. The company is the payer and pays a fixed rate of 2. 5% and 3. Libor Rates are available Here. This effective interest rate is then used to reclassify the hedging results to net interest result, causing the interest expense for the. To be more specific, let’s compare the Aqua and Yellow colored line, which represent the forward rate curve with 2-year and 3-year swap rate bumping up respectively. A basis point is equal to 0. An overnight index swap (OIS) uses an overnight rate as its floating rate. g. In this case the borrower would enter into an interest rate swap with a third party. Interest Rate Swap allows clients to manage or hedge their fixed or floating assets and liabilities. Interest rate swaps (“swaps”) account for the largest share of the euro area derivatives market. Written by Marc Wojno. BXS (BXS) has 2 splits in our BXS split history database. This sent yields soaring on interest-rate swaps, which lenders use to price mortgage products. Australia interest-rate swap spreads hit their widest in a decade DRAINED. Note to candidates: The swap rate (fixed rate) is very close to the last spot rate. As discussed in ASC 815-20-25-138, a private company may apply the simplified hedge accounting approach to a forward-starting interest rate swap entered into to hedge variable-rate interest payments on future debt issuances provided the qualifying criteria are met. In a vanilla swap, an adjustable payment and fixed payment are swapped between parties. An interest rate swap can be used to change the variable rate into a fixed rate. 74 % × 360 90 = 2. 75%. A vanilla interest rate swap consists of a fixed leg and a floating leg. This is done to manage risk, speculate on interest-rate changes, or convert an instrument from a fixed to a floating rate or vice versa. 000000041936 USD. 00% PAID to Bank = $87,260. Interest Rate Swap Definition. 5%, a whole 50bp lower than the 10% fixed interest rate originally offered on the loan. The New Zealand 90-day bank bill rate is the benchmark rate for floating interest rate payments in New Zealand swap agreements. Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep. Interest Rate Swaps Using a 91 day settlement period Fixed Interest Amount Floating Interest Amount Net Settlement Amount If BBSY = 6. Also known as interest rate protection agreements, swaps emerged as large banks, which do most of their lending on a floating rate basis (as opposed to fixed), began using swaps to leverage their fixed-rate borrowing capacity and obtain lower-cast floating rate funds. How to price swap rates? The “Forward Curve” is a graph depicting the path financial markets expect IBOR to follow in the future. par. Example #2. Swap rates are quoted in basis points. Dec 22 €STR = 100 - 97. Swaps are considered derivatives, similar to. 75 per cent, but markets place a 25 per cent probability that they will go further and. Last Year 1. Bxie Infinity conversion to US Dollar is 1 BXS = 0. The Floating Payer’s leg of the swap is based on the three-month LIBOR rate and the Fixed Payer’s leg of the swap is fixed at 3. The fixed rate is termed the “swap rate”. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point. A swap contract is an agreement between two counterparties to exchange a series of future cash flows, whereas a forward contract is a single exchange of value at a later date. 74 % × 360 90 = 2. The most popular form of interest rate swaps is the vanilla swaps that involve the exchange of a fixed interest rate for a floating rate, or vice versa. Each currency swap generally has two different currencies that are being used. 44% for 15 months, 2. There is no. At $288 trillion outstanding in notional value,1 the interest rate swap market is the largest over-the-counterAn interest rate swap, in its simplest form, is a private agreement between 2 counterparties to exchange a fixed interest obligation for a floating rate obligation over a specified duration. By holding iShares ETFs in combination with interest rate swaps, iShares interest rate hedged bond ETFs provide an easy and cost effective potential alternative for investors attempting to mitigate interest rate risk. Interest rate swaps are a popular derivative used by financial and non-financial companies. This coherent overview also focuses on new issues specifically related to swaps, such as accounting and taxation, credit risk and capital adequacy requirement, and systems and back office processing. For dollar-denominated swaps, it might be the Fed funds rate or the secured overnight financing rate (SOFR). The turnover of interest rate swaps grew by 10% to $4. The notional amounts were US$300,000 and AUD 200,000. 9 years (i. At the time of the swap agreement, the total value of. Determination of Cash Flows. 7%:• An interest rate swap commits two counterparties to exchange, over an agreed period, two streams of coupon payments, each calculated using a different interest rate index, but applied to a common notional principal amount. Floating rate asset left after interest rate risk is removed is Prime at 3. 25 percentage point rate increase to 4. com In an interest rate swap, this refers to the fixed interest rate that’s exchanged for a benchmark rate (such as SONIA, Libor, or Euribor) plus or minus a spread. The benchmark rate reform led to structural changes in OTC interest rate derivatives markets, driving up the share of instruments referencing overnight rates in overall turnover. Quickly see U. 2 Interest-Rate Swaps Consider one leg of an interest rate swap in which a floating rate of interest is exchanged for a specified fixed rate of interest, K. In this case the borrower would enter into an interest rate swap with a third party. Interest rate swaps are used to speculate or hedge against a change in interest rates. 1 Fixed-Floating Swaps. We've color-coded each closure date by. Here's how an interest rate swap works: Step 1: Two parties agree to enter into an interest rate swap. Longer duration swaps, say 10Y vs 2Y, will inherently have more duration.