It covers interest rate swaps, currency swaps & equity swaps along with their payouts. It covers exchange of fixed rate instruments with floating rate instruments. It will be helpful for students, exporters, importers & researchers.

1. Dr. Sandeep Kapoor, Associate Professor, Department of Business & Management Studies, MIET, Meerut.Dr. Sandeep Kapoor, Associate Professor, Department of Business & Management Studies, MIET, Meerut.
Interest Rate SwapsInterest Rate Swaps
Banker 2Banker 1 Company A Company B
Interest on Rs. 1 Cr @
MIBOR + 2%
Interest on Rs. 1 Cr @
11% Fix
1 Cr @ MIBOR + 2%
1 Cr @ 11% Fix
Swap Agreement
Payouts under Swaps
 Payouts depend upon MIBOR.Payouts depend upon MIBOR.
 Here we assume that above contract is for a period of two years.Here we assume that above contract is for a period of two years.
 For I Year MIBOR is 8%For I Year MIBOR is 8%
For II Year MIBOR is 10%For II Year MIBOR is 10%
 Co. A wants to pay fix rate of interest, & Co. B wants to pay floating rate.Co. A wants to pay fix rate of interest, & Co. B wants to pay floating rate.
 It can be done by a swap agreement.It can be done by a swap agreement.

2. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
First Year PayoutFirst Year Payout
If MIBOR is 8%If MIBOR is 8%
Company A Company B
Rs. 11 Lac (1Cr @ 11%)
Rs. 10 Lac (1Cr @ 10%) MIBOR+2%
Net payment will be A to B Rs. 1 Lac
Company B Banker 1
Paid Rs. 1 Lac
Paid Rs. 10 Lac
Total Payment by Co. A Rs. 11 Lac
Banker 2 Company A
Paid
Rs. 11 Lac
Received
Rs. 1 Lac
Net Payment by Co. B Rs. 10 Lac

3. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
Second Year PayoutSecond Year Payout
If MIBOR is 10%If MIBOR is 10%
Company A Company B
Rs. 11 Lac (1Cr @ 11%)
Rs. 12 Lac (1Cr @ 12%) MIBOR+2%
Net payment will be B to A Rs. 1 Lac
Company B Banker 1
Paid
Rs. 1 LacPaid Rs. 12 Lac
Total Payment by Co. A Rs. 11 Lac
Banker 2 Company A
Paid
Rs. 11 Lac
Received
Rs. 1 Lac
Net Payment by Co. B Rs. 12 Lac

4. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 Assume that X Co. and Y Co. require 1 million for fiveAssume that X Co. and Y Co. require 1 million for five
years term and have been offered following rates.years term and have been offered following rates.
 X Co. desired to borrow floating rate whileX Co. desired to borrow floating rate while
 Y Co. wants to borrow at fixed rate.Y Co. wants to borrow at fixed rate.
 Create a swap where in the intermediary bank chargesCreate a swap where in the intermediary bank charges
0.2% as commission and will appear equally attractive to0.2% as commission and will appear equally attractive to
both parties.both parties.
CompaniesCompanies FixedFixed FloatingFloating
X Co.X Co. 9.20%9.20% MIBOR + 0.20%MIBOR + 0.20%
Y Co.Y Co. 10.50%10.50% MIBOR + 0.50%MIBOR + 0.50%

5. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 If X Co. goes for floating rate then it will be MIBOR + 0.2%If X Co. goes for floating rate then it will be MIBOR + 0.2%
 If Y Co. goes for fixed rate then it will be 10.50%If Y Co. goes for fixed rate then it will be 10.50%
 So total cost will be 10.50% + MIBOR + 0.2% or 10.70%+ MIBORSo total cost will be 10.50% + MIBOR + 0.2% or 10.70%+ MIBOR
 Under Swap agreement:Under Swap agreement:
 X Co. raises 5 years fixed rate loan at 9.20% as required by Y Co.X Co. raises 5 years fixed rate loan at 9.20% as required by Y Co.
 Y Co. raises 5 years floating loan at MIBOR + 0.5% as required by XY Co. raises 5 years floating loan at MIBOR + 0.5% as required by X
Co.Co.
 Now total cost will be 9.20% + MIBOR + 0.5% or 9.70% + MIBORNow total cost will be 9.20% + MIBOR + 0.5% or 9.70% + MIBOR
 Total potential gain due to swap is 1% (10.70% - 9.70%)Total potential gain due to swap is 1% (10.70% - 9.70%)
 Gain available for each company = ½ (Total gain – Banker’s Comm.)Gain available for each company = ½ (Total gain – Banker’s Comm.)
 ½ (1.00 – 0.20 ) = 0.40%½ (1.00 – 0.20 ) = 0.40%

6. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 Hence effective cost of Borrowing:Hence effective cost of Borrowing:
 5 year Floating borrowing for X Co. = MIBOR + 0.20% -0.40% = MIBOR-0.20%5 year Floating borrowing for X Co. = MIBOR + 0.20% -0.40% = MIBOR-0.20%
 5 Year Fixed borrowing for Y Co. = 10.50% – 0.40% = 10.10%5 Year Fixed borrowing for Y Co. = 10.50% – 0.40% = 10.10%
Swap DealerX Co. Y Co.
5 Years 9.20%
(Fixed)
5 Years
MIBOR + 0.50%
(Floating)
Fixed 10.10%
MIBOR + 0.50%
Fixed 9.20%
MIBOR - 0.20%
Fixed 9.20% MIBOR + 0.50%

7. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 Assume that X Co. and Y Co. require 1 million for fiveAssume that X Co. and Y Co. require 1 million for five
years term and have been offered following rates.years term and have been offered following rates.
 X Co. desired to borrow floating rate whileX Co. desired to borrow floating rate while
 Y Co. wants to borrow at fixed rate.Y Co. wants to borrow at fixed rate.
 Create a swap without any intermediaryCreate a swap without any intermediary
 That will appear equally attractive to both parties.That will appear equally attractive to both parties.
CompaniesCompanies FixedFixed FloatingFloating
X Co.X Co. 9.20%9.20% MIBOR + 0.20%MIBOR + 0.20%
Y Co.Y Co. 10.50%10.50% MIBOR + 0.50%MIBOR + 0.50%

8. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 If X Co. goes for floating rate then it will be MIBOR + 0.2%If X Co. goes for floating rate then it will be MIBOR + 0.2%
 If Y Co. goes for fixed rate then it will be 10.50%If Y Co. goes for fixed rate then it will be 10.50%
 So total cost will be 10.50% + MIBOR + 0.2% or 10.70%+ MIBORSo total cost will be 10.50% + MIBOR + 0.2% or 10.70%+ MIBOR
 Under Swap agreement:Under Swap agreement:
 X Co. raises 5 years fixed rate loan at 9.20% as required by Y Co.X Co. raises 5 years fixed rate loan at 9.20% as required by Y Co.
 Y Co. raises 5 years floating loan at MIBOR + 0.5% as required by XY Co. raises 5 years floating loan at MIBOR + 0.5% as required by X
Co.Co.
 Now total cost will be 9.20% + MIBOR + 0.5% or 9.70% + MIBORNow total cost will be 9.20% + MIBOR + 0.5% or 9.70% + MIBOR
 Total potential gain due to swap is 1% (10.70% - 9.70%)Total potential gain due to swap is 1% (10.70% - 9.70%)
 Gain available for each company = ½ (Total gain)Gain available for each company = ½ (Total gain)
 ½ (1.00) = 0.50%½ (1.00) = 0.50%

9. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Interest Rate SwapsInterest Rate Swaps
 Hence effective cost of Borrowing:Hence effective cost of Borrowing:
 5 year Floating borrowing for X Co. = MIBOR + 0.20% -0.50% = MIBOR-0.30%5 year Floating borrowing for X Co. = MIBOR + 0.20% -0.50% = MIBOR-0.30%
 5 Year Fixed borrowing for Y Co. = 10.50% – 0.50% = 10%5 Year Fixed borrowing for Y Co. = 10.50% – 0.50% = 10%
X Co. Y Co.
5 Years 9.20%
(Fixed)
5 Years
MIBOR + 0.50%
(Floating)
Fixed 10%
MIBOR + 0.50%
Fixed 9.20%
MIBOR - 0.30% Y Co.
Fixed 9.20%
5 Years
MIBOR + 0.50%
(Floating)
MIBOR + 0.5%
X Co.
5 Years 9.20%
(Fixed)
Fixed 9.20% MIBOR + 0.5%

10. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Currency SwapCurrency Swap
Banker 2Banker 1 USA Co. India Co.
US MumbaiIndia New York
$ 1m @ 6%
For 5 years
$ 60 k
$1 = Rs. 70
Swap Bank
Rs. 7 Cr @ 12%
For 5 years
Rs. 84 Lac
$ 1m @ 6%
For 5 years
$ 60 k
Rs. 7 Cr @ 12%
For 5 years
Rs. 84 Lac
Requirement $ 1m
Getting @ 8%
Requirement Rs. 7 Cr
Getting @ 14%
12.25%
12%
6.25%
6%

11. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Currency SwapCurrency Swap
 Suppose company ‘X’ can borrow AUD floating @ LIBORSuppose company ‘X’ can borrow AUD floating @ LIBOR
+ 0.7% or INR @ 8.2% fixed.+ 0.7% or INR @ 8.2% fixed.
 Company ‘Y’ can borrow AUD @ LIBOR + 1.2% or INRCompany ‘Y’ can borrow AUD @ LIBOR + 1.2% or INR
@ 9.9% fixed as show in the table@ 9.9% fixed as show in the table
 Company ‘X’ needs AUD floating & ‘Y’ need INR fixed.Company ‘X’ needs AUD floating & ‘Y’ need INR fixed.
 Both parties approach to swap dealer to arrange swap.Both parties approach to swap dealer to arrange swap.
 FI arranges swap & required 50 basis point as commission.FI arranges swap & required 50 basis point as commission.
CurrencyCurrency Co. ‘X’Co. ‘X’ Co. “Y”Co. “Y”
AUD.AUD. LIBOR + 0.7%LIBOR + 0.7% LIBOR + 1.20%LIBOR + 1.20%
INRINR 8.2%8.2% 9.9%9.9%

12. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Currency SwapCurrency Swap
 X Co. has absolute advantage over the Co. ‘Y’ in both markets (i.e.X Co. has absolute advantage over the Co. ‘Y’ in both markets (i.e.
AUD floating & INR fixed).AUD floating & INR fixed).
 However Co. ‘Y’ has comparative advantage in AUD floating market.However Co. ‘Y’ has comparative advantage in AUD floating market.
 If they go straight thenIf they go straight then
 Co. ‘X’ will raise AUD floating @ LIBOR + 0.7%Co. ‘X’ will raise AUD floating @ LIBOR + 0.7%
 Co. ‘Y’ will raise INR fixed @ 9.9%Co. ‘Y’ will raise INR fixed @ 9.9%
 Thus total cost will be LIBOR + 0.7 + 9.9 = LIBOR + 10.6Thus total cost will be LIBOR + 0.7 + 9.9 = LIBOR + 10.6
 If the do not go straight thenIf the do not go straight then
 Co. ‘X’ will raise INR fixed @ 8.2%Co. ‘X’ will raise INR fixed @ 8.2%
 Co. ‘Y’ will raise AUD floating @ LIBOR + 1.20Co. ‘Y’ will raise AUD floating @ LIBOR + 1.20
 Thus total cost will be LIBOR + 1.2 + 8.2 = LIBOR + 9.4Thus total cost will be LIBOR + 1.2 + 8.2 = LIBOR + 9.4
 Thus potential gain is 1.20% (10.6 - 9.40)Thus potential gain is 1.20% (10.6 - 9.40)
 Gain available to each Co. = ½ (Total Gain – Swap dealer’s Comm.)Gain available to each Co. = ½ (Total Gain – Swap dealer’s Comm.)
 Gain available to each Co. = ½ (1.2 – 0.50) = 0.35%Gain available to each Co. = ½ (1.2 – 0.50) = 0.35%

13. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Currency SwapCurrency Swap
 Hence, effective cost of borrowing will be as follows:Hence, effective cost of borrowing will be as follows:
 AUD borrowing for Company ‘X’ = LIBOR + 0.70% - 0.35%AUD borrowing for Company ‘X’ = LIBOR + 0.70% - 0.35%
 = LIBOR + 0.35%= LIBOR + 0.35%
 INR borrowing for Company ‘Y’ = 9.9% - 0.35% = 9.44%INR borrowing for Company ‘Y’ = 9.9% - 0.35% = 9.44%
Swap DealerX Co. Y Co.
INR Fixed Loan AUD
Floating loan
INR Fixed 9.55%
LIBOR + 1.20%
INR Fixed 8.20%
LIBOR + 0.35%
INR Fixed 8.20%
AUD floating
LIBOR + 1.2%

14. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Equity SwapEquity Swap
 Under equity swap, the return in the form of dividend andUnder equity swap, the return in the form of dividend and
capital gain earned on an index or stock is exchanged,capital gain earned on an index or stock is exchanged,
 For either fixed or a floating rate of interest.For either fixed or a floating rate of interest.
 For example, returns of nifty can be exchanged for LIBORFor example, returns of nifty can be exchanged for LIBOR
for the next period with same principal orfor the next period with same principal or
 Returns of fixed rate investment exchange with floating rateReturns of fixed rate investment exchange with floating rate
investment.investment.
 X Co. & Y Co. have been offered the following interestX Co. & Y Co. have been offered the following interest
rates on their investment of Rs. 100 crore for 5 years term.rates on their investment of Rs. 100 crore for 5 years term.
CompanyCompany Fixed RateFixed Rate Floating RateFloating Rate
X Co.X Co. 8.25%8.25% LIBOR + 0.15LIBOR + 0.15
Y Co.Y Co. 9.50%9.50% LIBOR + 0.20LIBOR + 0.20

15. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Equity SwapEquity Swap
 X Co. wants a fixed rate and Y Co. a floating rate on theirX Co. wants a fixed rate and Y Co. a floating rate on their
investment.investment.
 How can they arrange swap that will net a bank, acting asHow can they arrange swap that will net a bank, acting as
intermediary 0.20% p.a. & will appear equally attractive to bothintermediary 0.20% p.a. & will appear equally attractive to both
the firms?the firms?
 Solution;Solution;
 If they go straight thenIf they go straight then
 Co. ‘X’ will invest @ fixed rate of 8.25%Co. ‘X’ will invest @ fixed rate of 8.25%
 Co. ‘Y’ will invest @ floating rate LIBOR + 0.20%Co. ‘Y’ will invest @ floating rate LIBOR + 0.20%
 Thus total return will be LIBOR + 0.20 + 8.25 = LIBOR + 8.45%Thus total return will be LIBOR + 0.20 + 8.25 = LIBOR + 8.45%
 If the do not go straight thenIf the do not go straight then
 Co. ‘X’ will invest @ floating rate LIBOR + 0.15%Co. ‘X’ will invest @ floating rate LIBOR + 0.15%
 Co. ‘Y’ will invest @ fixed rate of 9.50%Co. ‘Y’ will invest @ fixed rate of 9.50%
 Thus total return will be LIBOR + 0.15 + 9.50 = LIBOR + 9.65Thus total return will be LIBOR + 0.15 + 9.50 = LIBOR + 9.65
 Thus Potential gain is 1.20 (9.65 – 8.45)Thus Potential gain is 1.20 (9.65 – 8.45)

16. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
Equity SwapEquity Swap
 Thus Potential gain is 1.20 (9.65 – 8.45)Thus Potential gain is 1.20 (9.65 – 8.45)
 Gain available to each Co. = ½ (Total Gain – Swap dealer’s Comm.)Gain available to each Co. = ½ (Total Gain – Swap dealer’s Comm.)
 Gain available to each Co. = ½ (1.2 – 0.20) = 0.50%Gain available to each Co. = ½ (1.2 – 0.20) = 0.50%
 Hence, effective return on investment will be as follows:Hence, effective return on investment will be as follows:
 Fixed investment for X Co. = 8.25+0.50 = 8.75%Fixed investment for X Co. = 8.25+0.50 = 8.75%
 Floating investment for Y Co. = LIBOR + 0.20% + 0.50%Floating investment for Y Co. = LIBOR + 0.20% + 0.50%
 = LIBOR + 0.70%= LIBOR + 0.70%
Swap DealerX Co. Y Co.
5 Years
Floating @
LIBOR + 0.15%
5 Year Fixed
Investment
@ 9.50%
Fixed 9.50%
LIBOR + 0.70%
Fixed 8.75%
LIBOR + 0.15%
LIBOR + 0.15% Fixed 9.50%

17. Dr. Sandeep Kapoor, Associate Professor, Department of Business &
For any queryFor any query
Kindly contactKindly contact
sandypkapoor@gmail.comsandypkapoor@gmail.com
Thank YouThank You