Interest rate swaps are the most popular interest rate derivatives. Is there a reason why they are more popular than other interest rate derivatives (e.g. forwards, futures)? Is it because they were introduced first?
closed as too broad by skoestlmeier, Alex C, LocalVolatility, JejeBelfort, amdopt Nov 9 '18 at 13:51
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Interest Rate Swaps are popular products for the following reasons;
- They are comparable in risk terms and maturity terms to bonds, which span a multi-trillion dollar industry, and can be utilised in similar ways to bonds.
- They span different user types: pension funds, asset managers, speculators, corporates, governments, in order to serve some purpose which differ from user to user.
- They are transparent and relatively simple products.
- They are liquid in most major currencies.
- They are a fundamental product in terms of pricing; you price interest rate curves from them, and therefore they represent the basic and goto derivative for hedging that risk.
- They associate nicely with cross-currency swaps which provide access to risk hedging and speculation of a different sort.
The other products you mentioned suffer because they do not have these same characteristics. FRAs or forwards are too esoteric and much less liquid, futures are often liquid but they are constrained to short maturities and fixed dates. Swaptions are essentially a derivative of IRSs so are another layer of abstraction, which results in a smaller pool of interested parties.