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- 1. Financing: fixed and variable rates. The role of swap contracts. Presentation by: • Paulo Martins 65929 METI 19 Novembro 2013 • Vilma Jordão 59056 MEIC
- 2. Swaps • Has Grown alot in the past 20 years • Protection from financial risks • Balancing operational costs • Financing in moments of low market liquidity
- 3. Swap Dealer • Swap contracts aren’t made with well defined rules. • There is always some entity in the midle called Swap Dealer.
- 4. Types of Swaps • Interest Rate Swaps • Currency Swaps • Comodity Swaps • Credit Default Swaps • Equity Swaps
- 5. Interest Rate Swaps • In this kind of swap there is an exchange between fixed and variable interest rates. • It implies a great risk and results in great losses for one of the parts. • One of the parts pays the difference between the fixed and the variable interest rate.
- 6. Interest Rate Swaps - Example Two entities (α and β) need funding. • α wishes to get financed with a variable interest rate. • β wishes to get financed with a fixes interest rate.
- 7. Interest Rate Swaps - Example Rates offered to company α and β Fixed rates Variable rates Company α 6% Euribor 3 months + 1.25% Company β 7% Euribor 3 months + 1.50% α gets a loan of 10 m€, at a fixed rate of 6%, for 10 years; β gets a loan of 10 m€, at the variable rate Euribor 3 months + 1.5%, for 10 years.
- 8. Interest Rate Swaps - Example 1. α will have a loan at a variable rate, as wished, with a rate of: Euribor 3months + (6%-5.25%) = Euribor 3month + 0.75% 2. β will have a loan at a fixed rate, with a rate of: 5.25%+(Euribor 3months+1.5%)-Euribor 3 months = 6.75%
- 9. Interest Rate Swaps - Example If α had a loan at a variable rate, it would pay Euribor 3months + 1.25%, meaning a profit of 0.5%; If β had a loan at a fixed rate, it would pay 7%, meaning a profit of 0.25%. Taxa Valor Juro Empresa α 4.5% € 450 000 Empresa β 5.25% € 525 000
- 10. Currency Swaps This kind of swap consists on the deal between two entities, in the exchange for the obligations of a loan in one currency for another loan obligations of equal net value in another currency.
- 11. Currency Swaps - Types • FX-Swaps • Back-to-back • Cross currency swaps
- 12. Currency Swaps - Example 1M 1.4M
- 13. Currency Swaps - Example
- 14. Commodity Swaps The buyer and the seller both accept to exchange periodic payments, one with a fixed value and the other with a variable value, calculated over a predeterminated commodity amount
- 15. Commodity Swaps – Advantages and Goals • Allow to establish a limit to the volatility of the commodity prices • This way the raw material price stays immune to the market price flutuations
- 16. Commodity Swaps - Example
- 17. Credit Default Swaps CDS Seller CDS Buyer
- 18. Credit Default Swaps
- 19. Credit Default Swaps -38.600€ x 4 +49.200€ x 3 +1,049.200€ -1.000.000€ CDS Seller CDS Buyer 1.000.000€ - Valor actual das obrigações 42.900€
- 20. Equity Swaps In an equity swap, two parties agree to exchange a set of future cash flows periodically for a specified period of time.
- 21. Equity Swaps - Example • • • • • Notional Principal: $100 million Alpha Fund pays: Total returns on the S&P 500 Index Goldman Sachs pays: Fixed 6% Swap maturity: 3 years Payments to be made at the end of every six months, that is, 30th June and 31st December
- 22. Equity Swaps - Example Let’s see how the cash flows turn out in the first year. At the beginning, the S&P Total Return Index was at 2500 level, on 30th June it was 2600, and on 31st December it was at 2570. Alpha Pays Return on index = 2600/2500 = 4% 30th June 31st December = 100,000,000*0.04 = $4,000,000 Goldman Pays =100,000,000 * 182/365 * 6% =$2,991,780 Fixed payment =100,000,000 * 183/365 * 6% Return on index = 2570/2600 = - =$3,008,219 Floating payment 1.154% = 100,000,000*0.01154 = $1,154,000 Total payment Alpha pays nothing. = $3,008,219+$1,154,000 =$4,162,219
- 23. Thank You Questions?

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