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given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed

The swap rate is hedgeable, not neutral. Well, it is "risk-neutral". And the assumption is that the market will evolve towards the forward rates, which is not observed and would lead to absurdly high interest rates if it did happen.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 04:08:48 PM EST
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