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A fixed for floating rate swap with the floating rate calculated by squaring LIBOR expressed as a percentage (e.g. (3.0%)2=9.0%.) The LIBOR squared payer expects low rates and is willing to sell convexity in return for a high fixed rate. Receiving LIBOR squared can help to hedge a dealer's short options positions. These swaps are particularly useful in hedging exposure to changes in volatilities that are not linked to a specific price or rate level. They can be used in place of index amortizing swaps to hedge exposure to demand deposit withdrawal and credit card loan valuations at a bank. LIBOR squared caps and floors and LIBOR cubed instruments trade infrequently. See also Power Bond (1), Turbo Swap.
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