What are Swaps? Financial Derivatives Tutorial

In todays video we learn about Swaps.
These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. amzn.to/2WIoAL0
Check out our website www.onfinance.org/
Follow Patrick on twitter here: PatrickEBoyle
What is a Swap?
A swap is a financial derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. For example, in the case of a swap involving two bonds, the two parties would be exchanging the periodic interest (coupon) payments associated with the bonds. With a swap the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.
The cash flows are calculated over a notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.

[@arga400]

"This is really simple" *Proceeds to explain something super complicated* I wish I had found you sooner Patrick, your work is amazing thank you

[@commontater1785]

This guy is amazing. Explaining the underlying simplicity beneath financial complexity.

[@gilessamarawikrema9242]

Loved this presentation, both the content and the delivery

[@PBoyle]

Thanks Giles, I'm glad you found it useful.

[@mikestanmore2614]

"The first thing that happens" is you've lost a friend, and there's a contract out on a burger flipper! ;-) (Great explanation, BTW. Thankyou.)

[@linkz9268]

Thank you so much. Now I know more about the swap.

[@PBoyle]

Thanks, Glad you enjoyed the video

[@UFCPR]

Halfway through the video, I came to realize that it's essentially of a doctoral or PhD level! It will require extensive research and reading numerous books, papers, and watching videos for months to grasp even a portion of it.

[@nightwolf2666]

I worked for a convert-arb hedge fund, where we had to manage optionality and interest rate risk almost on a daily basis. You should do a video on Swap-tions.

[@NandoUnterman]

Thank you Patrick, always great content!!

[@qudizzle1]

I Still love reviewing these orders videos, great educational content !

[@user-ze4ih5ii3c]

Boyle is the best !

[@poohshmoo9892]

On this channel I hit the like button before watching the video.

[@egal1780]

The quality really skyrocketed, I Hope that you'll continue Like this :)

[@paullloyd1729]

Well done. Your presentations are fabulous. One could make a point in favor of different forms of derivatives (in your example of swaps). One could also make a point against derivatives (credit default swaps, synthetic CDO’s) and the countless bets made by pure speculation. Perhaps a video on what was done prior to the 1st swap you made as an example (prior to 1981). And the overall size of the derivative markets combined? And the inherent danger of these derivatives going wildly wrong.

[@Szoki666]

Wonderful explanations! I love this chanel, just subscribed. Thank you for the inspiration! May I ask if you tend to own a Range Rover by any chance?

[@OdedErell]

Thanks for your very informative videos! At about ~7:30 in this video, you are actually explaining what happened 4 months ago in the US regional banks. That's awesome! :-)

[@AB-lq1zd]

Wish I knew half as much as this guy

[@rk-zs5sy]

Can you do a video explaining how to keep your head so still?

[@kademan13]

God damn boy you are GOLDEN in this video

[@donitCreamkins]

Thanks A Great Video

[@emanamin24]

Just Great!

[@ronenoren8267]

Hello Patrick, thanks for the explanation. As I understand, retail investors cannot participate in swap trading. Do you know a way to emulate interest rate swap at a retail level ?

[@leojoseph5881]

how are swaps used for leveraged ETFs? I don't understand how they can achieve 3x from swaps, and who do they swap with?

[@weathermayne61]

Hi. I know I’m asking an new question on an old video: could you redo- this video in relation to the recent regional bank failures? Or I’d like to hear how an individual can write something like this on an ARM loan for a residential home purchase.

[@carlwashingtonpabelonio4736]

The Big short brought me here

[@GregThatcher]

Thanks!

[@PBoyle]

Glad you found it helpful!

[@quotidien_]

Are there entities that create custom swaps? This would do away with the need to go out and find counterparties like brokers do. Or is this something that dealers would engage in?

[@75pdubs]

An entity can reach out to dealers to create bespoke swaps to meet their needs. Then others may use those existing swaps.

[@home2roots]

Just found your channel - love it! However, i would humbly suggest you change your music-theme.😊 take care. Greetings from Norway

[@iampkn]

Can you do video for Equity Swap and Index swap

[@75pdubs]

Same concept except using an equity index such as sptr or a single name stock. The floating rate used to be 3mL but is now sofr.

[@poohshmoo9892]

Somehow youtube algorithm figured out I need better understanding how and why Archegos blew up

[@Cheeseatingjunglista]

I tried to headhunt you out of Nat West Mkts, as it then was, to Nomura, you declined, 6 months later you had joined them!!! Different role, different department oh dear me, an old git reliving the past, life's global fate I suspect. Interesting vid, as far as the vanilla goes, have you got a vid on other swap/forward combis like Swaptions for example? Or total return swaps as against stock lending/ EQ repo why which instrument is preferable to which situation for trading purposes?

[@75pdubs]

I believe the term TRS is mostly used when a dividend is inherent. From my understanding it basically falls under the umbrella of “Swap”. Swaptions are option. Basically work the same as any other option. The underlying will be the US swap. So a 3m10y receiver swaption @ 3.00% will give the buyer a 3 month option to enter into a receiver swap at 3% if the 10y swap rate is below 3% at expiration in 3 months. The best swap to use is whatever fits your liabilities best if you’re a hedger. The hedger also has to account for liquidity of the product especially if it’s a huge asset manager/pension fund/insurance company. So they may have to use proxies like SPTR swaps even though their liabilities are some lesser liquid index.

[@AnonymousAlcoholic772]

Amazingly financial swaps and porn swaps are 90% identical. Both involve legs even. So when is Ron Jeremy getting his honorary MBA?

[@musfiqurrahman7906]

Agent 47 teaching swap

[@vuufke4327]

so.. swaps option and futures are essentially the same thing

[@75pdubs]

Similar payoff in that they are mostly linear. A swap may have some convexity if I’m not mistaken. But yes they achieve similar objectives. Futures are exchange traded so margin is probably more “onerous” than a swap which is otc and probably has (had) 0 initial margin. The swaps probably only move money after a certain threshold like $100k pnl is breached so back offices aren’t constantly moving small sums of money back and forth on a daily basis.

[@justinmanley8131]

17 min of watching Patrick reading from a script. Still good stuff.

[@OkieDokieSmokie]

LS. 2JZ. Y’know, swaps.

[@TheWizardGamez]

If you ain’t putting in a hemi, your wasting your time

[@sujitwarrier4857]

Well this video is missing that signture dry wit.

[@michaelsulkoske4373]

You were doing pretty good there Patrick, until you started reading the jargon as opposed to explaining the concept in everyday language. Which kind of tells me your not as smart as you make yourself out to be.