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  1. 1. Presented By: Imad Ahmad Juzer Abbas Muqaddas Ali Sana Maqbool
  2. 2. <ul><li>A swap is an agreement between two counterparties to exchange two streams of cash flows—the parties &quot;swap&quot; the cash flow streams </li></ul><ul><li>Purpose is to change the character of an asset or liability without liquidation </li></ul><ul><li>Issuer of swap can contract to pay a floating rate and receive a fixed rate, or vice versa </li></ul><ul><li>Basic kind of swaps </li></ul><ul><ul><li>Interest rate swap </li></ul></ul><ul><ul><li>Currency swap </li></ul></ul><ul><li>Swaps can be executed </li></ul><ul><ul><li>in advance of the issuance of either fixed rate or variable rate debt. </li></ul></ul><ul><ul><li>at any time during the outstanding life of the underlying bonds </li></ul></ul>
  3. 3. YOU Original Counter Party Swap Counter Party Cash flow Stream A Cash Flow Stream A Cash Flow Stream B
  4. 4. <ul><li>Basis Rate Swap </li></ul><ul><li>Bond Swap </li></ul><ul><li>Commodity Swap </li></ul><ul><li>Credit Default Swap </li></ul><ul><li>Volatility Swap </li></ul><ul><li>Interest Rate Swap </li></ul><ul><li>Currency Swap </li></ul><ul><li>Forex Swap </li></ul>
  5. 5. <ul><li>Interest swaps are basically exchange of interest payment between two counter parties </li></ul><ul><li>Types: </li></ul><ul><ul><li>Floating for Fixed </li></ul></ul><ul><ul><li>Fixed for Floating </li></ul></ul><ul><ul><li>Floating for Floating (basis Swap) </li></ul></ul><ul><li>No exchange of principal; coupon flows only </li></ul>
  6. 6. Fixed Rate Floating Rate Company A 11% LIBOR + 1% Company B 10% LIBOR + 0.5%
  7. 7. Lender Bank B A Libor + 1% 10% 9.7% Libor 9.8% Libor Gain = 0.1% After Swap: A --- 9.8% + 1 % B --- Libor + 0.3%
  8. 8. <ul><li>Hedging </li></ul><ul><li>Speculation </li></ul>
  9. 9. <ul><li>A FOREX swap is an agreement to exchange currencies now at the prevailing spot rate and also to exchange the currencies back in the future at the prevailing forward rate. </li></ul><ul><li>Two type of Forex Swaps: Current – Forward ; Forward - Forward </li></ul>Current Jan 1 st 1 st Leg A Buy $100 @ 80 Rs/Dollar From B Forward April 1 st 2 nd Leg A will Sell $100 @ 90 Rs/Dollar to B If Market Value of Dollar is 85Rs/Dollar or 95Rs/Dollar
  10. 10. Current Jan 1 st Swap Agreement 2 nd Leg Apr 1 st A will sell $100 @ 90 Rs/Dollar to B Market Value of Dollar Rs.85/Dollar or Rs.95/Dollar 1 st Leg Jan 15 th A will Buy $100 @ 80 Rs/Dollar From B
  11. 11. <ul><li>Similar to Interest Rate Swap but interest payments are in different currencies </li></ul><ul><li>Principle Amount is also changed at the time of swap and maturity </li></ul><ul><li>All cash flows associated with those loans are paid: </li></ul><ul><ul><li>initial receipt/payment of loaned principal, </li></ul></ul><ul><ul><li>payment/receipt of interest (in the same currency) on that loan, </li></ul></ul><ul><ul><li>ultimate return/recovery of the principal at the end of the loan. </li></ul></ul>
  12. 12. Corporation Lender Swap Counter Party USD Loan USD Loan AUD Loan
  13. 13. <ul><li>Avoid changes in exchange rate </li></ul><ul><li>Currency swaps can be used to exploit inefficiencies in international debt markets. </li></ul>
  14. 14. <ul><li>Real Life Examples </li></ul>
  15. 15. <ul><li>Interest Rate Swap </li></ul><ul><ul><li>Lucky Cement </li></ul></ul><ul><ul><ul><li>company would receive six months T-Bills or KIBOR rates and pay fixed rates of mark-up ranging between 7.25% to 9.32%. </li></ul></ul></ul><ul><li>Forex Rate Swap </li></ul><ul><ul><li>PARCO </li></ul></ul><ul><ul><ul><li>The Largest FX Swap in Pakistan for PARCO US$387 million through United Bank Limited. </li></ul></ul></ul>
  16. 16. Thank You for Your Patience 