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Derivatives




Tax-Exempt Swap


An interest rate swap in which one/ both of its legs is/ are based on the yields of a tax-exempt variable-rate debt especially municipal debt securities or a tax-exempt index. In other words, a tax-exempt swap has its fixed rate interest tied to tax-exempt bonds such as US municipal bonds. This type of swap is only used in the U.S.

A tax-exempt swap can be decomposed into a vanilla interest rate swap and a tax-exempt floating rate/ LIBOR basis swap. As such, it is usually priced on the basis of the floating rate basis risk that a counterparty uses the swap to manage.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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