Interest Rate Swap (IRS)
In a plain vanilla IRS, the fixed payer pays a fixed coupon (the 'par swap rate' SFR) and receives floating (e.g., SOFR + spread ≈ SOFR flat). Notional is never exchanged. The fixed rate is set so NPV = 0 at inception. IRS are priced using the SOFR zero curve (post-2023 LIBOR transition). Main use cases: (1) converting floating-rate liabilities to fixed (interest rate risk management), (2) speculation on rate direction, (3) expressing curve views.
Related Terms
SOFR (Secured Overnight Financing Rate)
The US dollar risk-free rate based on overnight Treasury repo transactions, replacing LIBOR since 2023.
Par Swap Rate (SFR)
The fixed rate that makes an interest rate swap have zero NPV at inception.
Cost of Carry
The net financing cost of holding an asset — interest paid minus dividends/income received.
Rho (ρ)
The sensitivity of an option's price to a 1% change in the risk-free interest rate.