ABSTRACT
This chapter discusses equilibrium relationships making up several theorems, full account being taken of real-world attributes such as transaction costs. There are two basic theorems to be constructed. The first links the swap rate in the interest-rate swap market, the margin in the floating-rate note market, and the spread of yields in the fixed-rate Euro-bond market over yields in the government bond market all in the same currency. The second links the differential between swap rates in the interest-rate swap market in two different currencies, and the differential between Euro-bond spreads in the two respective currency sectors. There are four possible arbitrage transactions between the floating-rate note market, the interest-rate swap market, and the conventional fixed-rate market, which set a series of lower bounds for the margin. Finally, there is a lower bound set by the possibility of two-way arbitrage by investors.
