CURRENCY SWAP & INTREST RATE SWAP

1. CURRENCY SWAP & INTREST RATE
SWAP
Presented By:
Manish Kumar
MBA- Finance

2. A swap is a derivative contract through
which two parties exchange financial
instruments, such as interest rates,
commodities, or foreign exchange.

3. What is a 'Currency Swap‘
A currency swap, sometimes referred to as a cross-
currency swap, involves the exchange of interest and
sometimes of principal in one currency for the same in
another currency. Interest payments are exchanged at
fixed dates through the life of the contract. It is
considered to be a foreign exchange transaction and is
not required by law to be shown on a company's
balance sheet.

4. BREAKING DOWN 'Currency Swap‘
A currency swap can be done in several ways. If there is
a full exchange of principal when the deal is initiated, the
exchange is reversed at the maturity date. Currency
swap maturities are negotiable for at least 10 years,
making them a very flexible method of foreign exchange.
Interest rates can be fixed or floating

5. Background
Currency swaps were originally done to get around
exchange controls. As most developed economies have
eliminated controls, they are done most commonly to hedge
long-term investments and to change the interest rate
exposure of the two parties.

6. Exchange of Principal
In a currency swap, the parties agree in advance whether or
not they will exchange the principal amounts of the two
currencies at the beginning of the transaction. The two
principal amounts create an implied exchange rate. For
example, if a swap involves exchanging €10 million vs $12.5
million, that creates an implied EUR/USD exchange rate of
1.25. At maturity, the same two principal amounts must be
exchanged, which creates exchange rate risk as the market
may have moved far from 1.25 in the intervening years.

7. Exchange of Interest Rates
There are three variations on the exchange of interest rates:
fixed rate to fixed rate; floating rate to floating rate; or fixed
rate to floating rate. This means that in a swap between euros
and dollars, a party that has an initial obligation to pay a fixed
interest rate on a euro loan can exchange that for a fixed
interest rate in dollars or for a floating rate in dollars.
Alternatively, a party whose euro loan is at a floating interest
rate can exchange that for either a floating or a fixed rate in
dollars. A swap of two floating rates is sometimes called a
basis swap.
Interest rate payments are usually calculated quarterly and
exchanged semi-annually, although swaps can be structured
as needed. Interest payments are generally not netted
because they are in different currencies.

8. What is an 'Interest Rate Swap‘
An interest rate swap is an agreement between two
counterparties in which one stream of future interest payments
is exchanged for another based on a specified principal
amount. Interest rate swaps usually involve the exchange of a
fixed interest rate for a floating rate, or vice versa, to reduce or
increase exposure to fluctuations in interest rates or to obtain
a marginally lower interest rate than would have been possible
without the swap.

10. BREAKING DOWN 'Interest Rate Swap‘
A swap can also involve the exchange of one type of floating
rate for another, which is called a basis swap.
Interest rate swaps are the exchange of one set of cash flows
for another. Because they trade over the counter (OTC), the
contracts are between two or more parties according to their
desired specifications and can be customized in many
different ways. Swaps are often utilized if a company can
borrow money easily at one type of interest rate but prefers a
different type

11. Fixed to Floating
For example, consider a company named TSI that can issue
a bond at a very attractive fixed interest rate to its investors.
The company's management feels that it can get a better
cash flow from a floating rate. In this case, TSI can enter into
a swap with a counterparty bank in which the company
receives a fixed rate and pays a floating rate. The swap is
structured to match the maturity and cash flow of the fixed-
rate bond, and the two fixed-rate payment streams are
netted. TSI and the bank choose the preferred floating-rate
index, which is usually LIBOR for a one-, three- or six-month
maturity. TSI then receives LIBOR plus or minus a spread
that reflects both interest rate conditions in the market and its
credit rating.

12. Floating to Fixed
A company that does not have access to a fixed-rate loan
may borrow at a floating rate and enter into a swap to
achieve a fixed rate. The floating-rate tenor, reset and
payment dates on the loan are mirrored on the swap and
netted. The fixed-rate leg of the swap becomes the
company's borrowing rate.

13. Float to Float
Companies sometimes enter into a swap to change
the type or tenor of the floating rate index that they
pay; this is known as a basis swap. A company can
swap from three-month LIBOR to six-month
LIBOR, for example, either because the rate is
more attractive or it matches other payment flows.
A company can also switch to a different index,
such as the federal funds rate, commercial paper
or the Treasury bill rate.

14. THANK YOU