Swap

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Swap

  1. 1. Financial Terms related to Swap This document is part of the valuable contents available at www.ftpall.com, a free onlineglossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor.SWAPAmortizing interest rate swap • Swap in which the principal or national amount rises (falls) as interest rates rise (decline).Asset for asset swap • Creditors exchange the debt of one defaulting borrower for the debt of another defaulting borrower.Asset swap • An interest rate swap used to alter the cash flow characteristics of an institutions assets so as to provide a better match with its liabilities.Basis swap • See interest rate swap.Call swaption
  2. 2. www.ftpall.com 2|Page • A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The writer therefore becomes the fixed-rate receiver/floating rate payer.Circus swap • A fixed rate currency swap against floating U.S. dollar LIBOR payments.Coupon swap • See interest rate swap.Cross currency swap Find thousands of financial terms at www.ftpall.com • An interest-rate swap in which the interest payments due are denominated in different currencies.Currency swap • An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency.Currency swaps • By entering into a currency swap institutions can hedge their currency risk exposure. In a fixedfixed currency swap, one financial institution sends fixed interest rate dollar-denominated payments in exchange for say fixing interest rate sterling- denominated payments.Debt swap • A set of transactions (also called a debt-equity swap) in which a firm buys a countrys dollar bank debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local equity.Differential swap • Swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. Payments are in one currency.
  3. 3. www.ftpall.com 3|PageEquity swap • A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.Extension swap • Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly longer current maturity. Find thousands of financial terms at www.ftpall.com • Extending maturity through a swap, for example, selling a 2-year note and buying one with a slightly longer current maturity.Foreign exchange swap • An agreement to exchange stipulated amounts of one currency for another currency at one or more future dates.Guarantor/swap program • Freddie Mac takes a pool of mortgages from an originator and gives a PC that is backed by the mortgages in that pool. By doing so, the originator gets the Freddie Mac guarantee and Freddie Mac gets a fee (the difference between the cash flow from the mortgage pool and the payments promised to the originator).Interest rate swap • An exchange by borrowers or asset holders of interest-rate payments at two different rates (often one rate is fixed, the other floating). In a basis swap, both rates are floating. • The buyer of the swap agrees to make a number of fixed interest rate payments periodically to the seller on some agreed upon notational amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notational amount.
  4. 4. www.ftpall.com 4|Page • A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable. • Is the contract whereby one party typically agrees to exchange a floating rate for a fixed coupon rate. There are many variations to this theme. Some of these other swaps can be cross border, fixed-for-fixed, or floating-for floating. The common denominator to these transactions is the swapping of cashflows and not principal amounts. There are predetermined periodic adjustments in cash flow payments. Find thousands of financial terms at www.ftpall.comIntermarket spread swaps • An exchange of one bond for another based on the managers projection of a realignment of spreads between sectors of the bond market.Liability swap • An interest rate swap used to alter the cash flow characteristics of an institutions liabilities so as to provide a better match with its assets.Pure yield pickup swap • Moving to higher yield bonds.Put swaption • A financial tool in which the buyer has the right, or option, to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.Quanto swap • See: differential swap.Rate anticipation swaps • An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investors assumptions about future changes in
  5. 5. www.ftpall.com 5|Page interest rates.Stock swap transaction • An acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.Substitution swap • A swap in which a money manager exchanges one bond for another bond that is similar in terms of coupon, maturity, and credit quality, but offers a higher yield. Find thousands of financial terms at www.ftpall.comSwap • (1) In securities, selling one issue and buying another. (2) In foreign exchange, buying a currency spot and simultaneously selling it forward. • An arrangement whereby two companies lend to each other on different terms, e.g. in different currencies, and/or at different interest rates, fixed or floating. • Is a customized financial transaction between two or more counterparties. However, banks or brokerage firms often act as intermediaries or assume some of the risk of the total transaction as well. A swap is engineered between counterparties who agree to make periodic payments or adjusts to one another. Swaps cover interest rate, equity, commodity and currency products. They can be simple floating for fixed exchanges or complex hybrid products with multiple option features. Swaps are not exclusively OTC transactions because listed instruments are often include in the risk management of the position. Often managers evaluate the relative merits of conducting a swap (OTC) or a hedge predicated on listed instruments. The interaction between these two markets promotes greater financial efficiencies.Swap assignment • Related: swap sale.
  6. 6. www.ftpall.com 6|PageSwap buy back • The sale of an interest rate swap by one counterparty to the other, effectively ending the swap.Swap commodity • The buyer of the swap agrees to make a number of payments periodically tied to the price of a commodity such as oil and receive fixed payments. By entering into a commodity swap, both parties attempt to hedge their exposures to the commodity prices. Find thousands of financial terms at www.ftpall.comSwap currency • The buyer of the swap agrees to make a number of fixed or floating interest rate payments periodically to the seller in one currency on some agreed upon notional amount and receive payments denoted in another currency. For instance, one party pays UD dollars and receives British pounds. By entering into a currency swap, both parties attempt to hedge their FX exposures.Swap equity • The buyer of the swap agrees to make a number of payments periodically tied to return on some equity index (such as S&P 500 index) and receive fixed payments (such as T-Bill rate). By entering into a equity swap, both parties attempt to hedge their exposures to stock market.Swap interest rate • The buyer of the Swap agrees to make a number of fixed interest rate payments periodically to the seller or some agreed upon notional amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notional amount. By entering into the swap, both parties attempt to hedge their interest rate exposures.Swap option
  7. 7. www.ftpall.com 7|Page • See: Swaption. Related: Quality option.Swap rate • In the foreign-exchange market, the difference between the spot and forward rates at which a currency is traded. • The difference between spot and forward rates expressed in points, e.g., $0.0001 per pound sterling.Swap reversal Find thousands of financial terms at www.ftpall.com • An interest rate swap designed to end a counterpartys role in another interest rate swap, accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount.Swap sale • Also called a swap assignment, a transaction that ends one counterpartys role in an interest rate swap by substituting a new counterparty whose credit is acceptable to the other original counterparty.Swaption • An option on an interest-rate swap. • Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rateswap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes thecounterparty to the swap if the buyer exercises. • Is an option on a swap. This option can be a put, call or myriad combination of option features.Tax swap • Swapping two similar bonds to receive a tax benefit.
  8. 8. www.ftpall.com 8|PageThe imm swap • A swap of 1-year fixed against 3-month LIBOR, where the 3-month rate floats. The start, end, and intermediate reset dates are set to coincide with the dates on four successive IMM contracts for 3-month Eurodollars.Toxic waste swap • Is a transaction whereby two traders agree to exchange toxic waste or deeply underwater securities with one another with a swap transaction. Here, the traders can hide the losses associated with the initial losing position. Nevertheless, both Find thousands of financial terms at www.ftpall.com parties continue to hold positions insecurities which are inherently overvalued for trading or investment purposes. Upon discovery these positions will be subject to severe mark downs in price.

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