2. A swap is an agreement b/w two parties to exchange
sequences of cash flows for a set period of time .
Swaps are private agreement b/w 2 parties .
At least one of these series of cash flow is determined
by a random variable ,such as –
1. interest rate.
2. foreign exchange rate
3. equity price
3. exchange of interest payments on some notional amount.
No exchange of principal amount.
Converts the interest rate on an asset or liability from;
-Fixed to floating
-Floating to fixed
-Floating to floating
Allows the user to align risk characteristics of assets and
liabilities.
A swap transaction, is a custom-tailored bilateral agreement.
5. It is the most commonly practiced & also
called plain vanilla swap .
Plan vanilla swap are typically n exchange of
floating rate interest obligation for fixed rate
interest obligation .
6. Exchange of fixed rate of interest for floating
and & vice versa.
Denominated in same currency ,on notional
amount.
Principals are not exchange .
Based on comparative advantage .
Used to hedge against adverse movement in
interest rate .
8. Hedging :
A hedge is an investment that protects one’s finances
from a risky situation. And is done to minimize chance
that your asset will loose value.
Speculation :
It involves trading a financial instrument involving high
risk, in expectation of significant returns. The motive is
to take maximum advantage from fluctuations in the
market.
9. A financial contract for principal and fixed
rate of interest payment on a loan in one
currency for another currency.
Currencies are exchanged during the life of
the swap at spot rate prevailing on the date
of the contract.
10. A contract between two counterparties .
Commitment to an exchange of cashflows over
an agreed period.
One counterparty pays a fixed or floating rate
on principal amount, denominated in one
currency.
The other counterparty pays a fixed or floating
rate on a (different) principal amount,
denominated in another currency.
Banks act as intermediaries to eliminate
counterparty risk.
11. Currency swap have two main uses:
To secure cheaper debt (by borrowing at the best
available rate regardless of currency and then swapping
for debt in desired currency using a back-to-back loan)
To hedge against ( reduce exposure to )
exchange rate fluctuations
12. There are two different kinds of swaptions:
- A payer swaption: in this the purchaer has the
right, but not the obligation, to enter into a swap
contract where he becomes the fixed-rate payer
and the floating reciever.
- A receiver swaption Is the opposite; the
purchaser has the option to enter into a swap
contract where he will receive the fixed rate and
pay the floating rate.
