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Snowball IRS


It stands for a snowball interest rate swap; a structured swap which consists of a funding leg and a coupon payment stream, whereby the coupon payment made on a given date is calculated as the sum of a fraction of the coupon payment made in the previous period plus an amount determined by the rate process in the respective coupon payment period. In this sense, each coupon payment is based on the size of the previous one, hence the name “snowball”. It is in this swap that the holder pays, instead of the floating spot rate, a starting coupon rate over the first year, and in the successive years a rate equal to the strike rate plus the previous coupon minus the spot rate.

Under a snowball interest rate swap, a debt issuer receives a floating rate (e.g., LIBOR) and pays a “snowball” coupon. The snowball coupon is continually adjusted by an accrual factor, following the first lockout period (first year) of the swap in which it is kept fixed. After this period, the issuer has the right to cancel the swap. The snowball interest rate swap offers a guaranteed initial coupon, while forthcoming payments are determined by how fast the floating rate rises or falls. This structure is typically callable.

This swap is sometimes simply known as snowball swap.



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