can nyone tell me abt swaps having bond as an underlying?? detailed explanation or a link whr i get it myself
Do you mean a credit default swap (CDS) which is very common derivative these days and has a bond as an underlier or a total return swap on a bond? a) CDS is a big level two topic, but basically a CDS buyer is buying insurance for a bond default. The counterparty must buy the bond at par if the bond issuer defaults (or restructures or 5 other things). For that privilege the buyer pays the seller a regular fee. The size of the fee tells you a lot about the markets feelings about bond default. A key difference between a CDS and a bond swap is that when the company defaults, any senior debt can be delivered so it’s something like a basket option. b) A total return swap on a bond is a much more plain vanilla agreement but not nearly as common as a). Here one party pays probably LIBOR and the other party pays the total return on a designated reference bond including price change and coupon payments.