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Bridge over ocean
1 January 1997 Research Foundation

Interest Rate Modeling and the Risk Premiums in Interest Rate Swaps

This monograph addresses the return side of the decision to use interest rate swaps or other interest rate contingent claims.

Interest Rate Modeling and the Risk Premiums in Interest Rate Swaps View the full book (PDF)

This monograph addresses the return side of the decision to use interest rate swaps or other interest rate contingent claims. The author demonstrates how an at-the-market swap with a risk premium can have significant impact on the expected return from using the swap. The main insight is that valuation is based on 'risk-neutral,' no-arbitrage relationships whereas expected returns are based on subjective probabilities unadjusted for risk.