Primer on Interest Rate Parity & Basis Swaps

Attached below is a cool primer on interest rate swaps, money market swaps and cross currency basis swaps. It explains some basic pricing principles and is a good read

Interest Rate Parity & Basis Swaps - Tuckman, Porfirio (Lehman Brothers)

There will be some more discussion later on in a future post: as we will see that Libor / OIS basis swaps exploded in the 2008 Financial Crisis, and EUR/USD Cross currency swaps were extremely volatile from 2008 to 2011 (owing mainly to the fact that most European Banks do not have USD deposits and so need to fund their USD operations through the dealer market).

To get the most out of this paper, try working out the examples by hand and following the math provided by the paper.