The most common IRS is a fixed for floating swap, whereby one party will make payments to the other based on an initially agreed fixed rate of interest, to receive back payments based on a floating interest rate index. Each of these series of types of mis reports pdf is termed a ‘leg’, so a typical IRS has both a fixed and a floating leg. EUR or STIBOR in SEK.
Each currency has its own standard market conventions regarding the frequency of payments, the day count conventions and the end-of-month rule. There is no consensus on the scope of naming convention for different types of IRS. Even a wide description of IRS contracts only includes those whose legs are denominated in the same currency. If the floating leg is redefined to be an overnight index, such as EONIA, SONIA, FFOIS, etc. Some financial literature may classify OISs as a subset of IRSs and other literature may recognise a distinct separation.
The legs on SBSs will necessarily be different interest indexes, such as 1M, LIBOR, 3M LIBOR, 6M LIBOR, SONIA, etc. Interest rate swaps are used to hedge against or speculate on changes in interest rates. Interest rate swaps are also used speculatively by hedge funds or other investors who expect a change in interest rates or the relationships between them. Traditionally, fixed income investors who expected rates to fall would purchase cash bonds, whose value increased as rates fell. A vanilla IRS is the term used for standardised IRSs. Typically these will have none of the above customisations, and instead exhibit constant notional throughout, implied payment and accrual dates and benchmark calculation conventions by currency.
A vanilla IRS is also characterised by one leg being ‘fixed’ and the second leg ‘floating’ referencing an -IBOR index. IRS can be computed by determining the PV of each fixed leg and floating leg separately and summing. IBOR index rates of the appropriate currency. Historically IRSs were valued using discount factors derived from the same curve used to forecast the -IBOR rates.