in late 1986, the contagion spread into other sectors of the floaters market.9 Many floaters cheapened considerably. As before, contrary-minded fixed- rate investors could exploit this situation through the purchase of a rela- tively cheap (from the investors perspective) floater while simultaneously taking a short position in an interest rate swap (pay floating/receive fixed) thereby creating a synthetic fixed-rate investment. The investor makes floating-rate payments (say based on LIBOR) to their counterparty and receives fixed-rate payments equal to the Treasury yield plus the swap spread. Accordingly, the fixed rate on this synthetic security is equal to the sum of the following: (1) the Treasury bond yield that matches the swaps tenor; (2) the swap spread; and (3) the floaters index spread.       NON-VANILLA INTEREST-RATE SWAPS   The swap market is very flexible and instruments can be tailor-made to fit the requirements of individual customers. A wide variety of swap con- tracts are traded in the market. Although the most common reference rate for the floating-leg of a swap is six-month Libor for a semiannual paying floating leg, other reference rates that have been used include three-month Libor, the prime rate (for dollar swaps), the one-month commercial paper rate, and the Treasury bill rate, and the municipal bond rate. The term of a swap need not be fixed; swaps may be extendible or putable. In an extendible swap, one of the parties has the right but not the obligation to extend the life of the swap beyond the fixed maturity date, while in a putable swap one party has the right to terminate the swap prior to the specified maturity date.   9Suresh E. Krishman, "Asset-Based Interest Rate Swaps," Chapter 8 in Interest Rate Swaps.     It is also possible to transact options on swaps, known as swaptions. A swaption is the right to enter into a swap agreement at some point in the future, during the life of the option. Essentially a swaption is an option to exchange a fixed-rate bond cash flow for a floating-rate bond cash flow structure. As a floating-rate bond is valued on its principal value at the start of a swap, a swaption may be viewed as the value on a fixed-rate bond, with a strike price that is equal to the face value of the floating-rate bond. Swaptions will be described in more detail later. Other swaps are described below.   Constant Maturity Swap In a constant maturity swap, the parties exchange a Libor rate for a fixed