Submitted to: Sir Imtiaz askariBy: MUHAMMED NISAR(3105) TARIQ ANIS(3234)
Definition: In a swap, two counterparties agree to exchange or swap cash flows at periodic intervals.Nature of Swaps: A swap is an agreement to exchange cash flows at specified future times according to certain specified rulesThere are two types of swaps: Interest rate swap Currency swap
Definition: An exchange of fixed-rate interest payments for floating-rate interest payments. Reason: One party actually wants fixed rate debt, but can get a better deal on floating rate; the other party wants floating rate debt, but can get a better deal on fixed rate. Both parties can gain by swapping loan payments, usually through a bank as a financial intermediary (FI), which charges a fee to broker the transaction.
SWAP BANKo Broker bank Arranges the deals but does not assume any of the risk Charges a commission/fee for structuring and servicing the swap.o Dealer bank Dealer willing to take a position in one side, therefore assume some risk Dealer would not only receive a commission for arranging the swap Take a position in the swap
Typical Uses of an Interest Rate Swap Converting a liability from fixed rate to floating rate floating rate to fixed rate Converting an investment from fixed rate to floating rate floating rate to fixed rate
Maturity Bid (%) Offer (%) Swap Rate (%)2 years 6.03 6.06 6.0453 years 6.21 6.24 6.2254 years 6.35 6.39 6.3705 years 6.47 6.51 6.4907 years 6.65 6.68 6.66510 years 6.83 6.87 6.850
Swaps concerns comparative advantages, use of interest rate swap to transform a liability Co. argued they have an when borrowing in fixed rate, whereas other companies have a comparative advantage in the floating rate Company may borrow fixed when it wants floating or borrow floating when it wants fixed The swap is used to transform a fixed rate loan into floating rate loan and vice versa.
Definition: An exchange of interest payments in one currency for interest payments in another currency. One party swaps the interest payments of debt (bonds) denominated in one currency (USD) for the interest payment of debt (bonds) denominated in another currency (SF or BP), usually on a "fixed-for- fixed rate" basis. Currency swap is used for cost savings on debt, or for hedging long term currency risk.
General Electric wants to borrow POUND Qantas wants to borrow USD
Interest Rate Swap: In an interest rate swap the principal is not exchangedCurrency Swap: In a currency swap the principal is usually exchanged at the beginning and the end of the swap’s life