AI for Derivatives: Claude Tools for IRS, CDS, and OTC Derivative Analysis

Derivatives and AI

OTC derivatives — interest rate swaps, credit default swaps, cross-currency swaps, and structured products — underpin global financial markets with over $600 trillion in notional outstanding. Derivatives analysis demands precision in pricing, risk management, and regulatory compliance. Claude with ClaudeFinLab handles swap pricing, CDS analytics, CVA calculations, and ISDA documentation review.

Interest Rate Swap Pricing

Interest rate swaps exchange fixed for floating payments — the most widely traded OTC derivative:

• "Price a 5-year USD fixed-for-floating interest rate swap: notional $50M, pay fixed / receive SOFR (quarterly). Current 5-year swap rate: 4.42%. SOFR: 5.31%. Net present value at inception (should be zero for at-market swap). Compute: fixed leg payments (semi-annual), floating leg payments (quarterly using forward SOFR curve), and DV01 (dollar value of 1 basis point)."
• "Calculate mark-to-market on an existing 3-year IRS: originally entered at 3.85% fixed, current 3-year swap rate 4.52%. Notional $100M. Remaining tenor 2.5 years. Compute: MTM gain/loss (we pay fixed), DV01, and the margin call at 95% confidence interval if rates move +/- 50bps."
• "Price a cross-currency swap: borrow $50M at SOFR+80bps, swap to EUR at EURIBOR+75bps + currency basis. Current USD/EUR basis swap: -25bps (EUR demand premium). Effective EUR funding cost? Compare to issuing EUR bonds directly at EURIBOR+95bps."

Credit Default Swaps (CDS)

• "Price a 5-year CDS on investment-grade corporate: probability of default (PD) 1.8% annually, recovery rate 40%, risk-free rate 4.5%. Apply the simplified CDS pricing formula. What is the fair CDS spread in basis points? If the market CDS spread is 85bps, is the bond cheap or rich?"
• "Analyze the CDS-bond basis for this IG issuer: 5-year CDS spread 110bps, 5-year bond Z-spread 135bps. Basis = +25bps (bond wider). What are the typical reasons for a positive basis and how would you trade this (basis package)?"
• "Model a CDS index (CDX IG Series 42): 125 reference entities, 5-year maturity, quoted spread 70bps. If 3 entities default (recovery 40%), what is the loss to protection seller and the new spread for the remaining 122-name index?"

CVA, DVA, and Counterparty Credit Risk

CVA (Credit Valuation Adjustment) adjusts derivative fair value for counterparty credit risk:

• "Compute bilateral CVA/DVA for a 5-year IRS: notional $100M, current MTM $2.4M (in our favor). Counterparty CDS spread: 180bps, recovery 40%. Our own CDS: 45bps, recovery 40%. Expected exposure profile: use trapezoidal approximation over 10 semi-annual periods. Compute: unilateral CVA (cost of counterparty default), DVA (benefit of our own default)."
• "Analyze the impact of a CSA (Credit Support Annex) on CVA: without CSA, CVA on a $500M swap book = $8.4M. With daily VM (variation margin) collateral under ISDA VM CSA, expected exposure reduces by ~85%. What is the post-CSA CVA and the XVA capital saving?"

Structured Rates Products

• "Price an interest rate cap: notional $50M, 3-year tenor, strike rate 5.0%, SOFR forward curve (attached). Apply Black-76 model. At each reset date, compute the caplet payoff if SOFR exceeds strike. What is the up-front premium at current implied vol of 42%?"
• "Structure a zero-cost collar for a floating-rate borrower: pay fixed floor at 3.5% (buy floor), receive cap at 6.0% (sell cap). Borrowing rate SOFR+150bps. At current vol, is this collar zero-cost? If not, adjust strikes until premium is zero."
• "Analyze a callable swap: receiver swaption on a 10-year swap with option to exercise in year 3. Fixed rate 4.85%, notional $75M. Black-76 implied vol for 3y10y swaption: 0.85% normal vol. Compute option value and delta. What does exercise at year 3 mean for the issuer who sold callable notes?"

ISDA Documentation and Regulatory Compliance

• "Review this ISDA Master Agreement provision: Section 6(e)(i) Loss calculation method. Counterparty is disputing the close-out calculation of $4.2M. The dispute relates to whether mid-market quotes or bid-offer adjusted quotes should be used. Under 2002 ISDA MA, what is the standard and how should the dispute be resolved?"
• "Assess EMIR clearing obligation: this EUR 50M 5-year IRS between two EU financial counterparties (both above €3B threshold). Is this trade subject to mandatory clearing at an authorized CCP? What are the margin requirements under EMIR Refit?"
• "Compute IM (initial margin) under SIMM (ISDA SIMMTM): delta sensitivities for a rates portfolio — 2y point: $180K, 5y point: $320K, 10y point: $410K, 30y point: $125K. Apply correlation matrix within tenor bucket. What is the SIMM IM and how does this compare to the standardized schedule approach?"

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