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> Every 3 (or 6) months, you have to cough LIBOR in order to receive the fixed leg. > Why is this so hard for people to understand? Question answered by earli

• vegabook 11y ago
  apologies. It's not obvious because the jargon is opaque (though I still question why, if it's not understood, it's upvoted to page 1). In swaps, as the word suggests, you must pay (the prevailing short-term interest rate) every few months for the right to receive a pre-agreed (long term) interest rate. The key is that you must pay, and if your counterparty does not pay, you will not pay either. So you have a much lower credit risk than an outright lending of money since if the counterparty starts failing, you can stop paying. Sure there is still some credit risk, but it's nowhere near as high as it would be to lend money for 10 years "naked". And since the crisis, moreover, we have "daily margining", that is, if you win in any 24 hour period, your counterparty must pay your winnings. If he doesn't you can cancel the contract. That's much lower risk than betting on repayment with no feedback, for 10 years. I'm just generally quite "surprised" that this stuff is coming out of Bloomberg who should know better.
  • gmarx 11y ago
    very clear. Thanks