1. Submitted to: Sir Imtiaz askari
By: MUHAMMED NISAR(3105)
TARIQ ANIS(3234)

2. Definition:
In a swap, two counterparties agree to exchange or swap
cash flows at periodic intervals.
Nature of Swaps:
A swap is an agreement to exchange cash flows at specified
future times according to certain specified rules
There are two types of swaps:
 Interest rate swap
 Currency swap

3. Definition:
An exchange of fixed-rate interest payments for
floating-rate interest payments.
Reason: One party actually wants fixed rate debt, but
can get a better deal on floating rate; the other party
wants floating rate debt, but can get a better deal on
fixed rate. Both parties can gain by swapping loan
payments, usually through a bank as a financial
intermediary (FI), which charges a fee to broker the
transaction.

4. SWAP BANK
o Broker bank
 Arranges the deals but does not assume any of the risk
 Charges a commission/fee for structuring and servicing the
swap.
o Dealer bank
 Dealer willing to take a position in one side, therefore assume some
risk
 Dealer would not only receive a commission for arranging the swap
 Take a position in the swap

5. Typical Uses of an Interest Rate Swap
 Converting a liability from
 fixed rate to floating rate
 floating rate to fixed rate
 Converting an investment from
 fixed rate to floating rate
 floating rate to fixed rate

8. Maturity Bid (%) Offer (%) Swap Rate (%)
2 years 6.03 6.06 6.045
3 years 6.21 6.24 6.225
4 years 6.35 6.39 6.370
5 years 6.47 6.51 6.490
7 years 6.65 6.68 6.665
10 years 6.83 6.87 6.850

9.  Swaps concerns comparative advantages, use of interest
rate swap to transform a liability
 Co. argued they have an when borrowing in fixed rate,
whereas other companies have a comparative advantage in
the floating rate
 Company may borrow fixed when it wants floating or
borrow floating when it wants fixed
 The swap is used to transform a fixed rate loan into floating
rate loan and vice versa.

11. Definition:
An exchange of interest payments in one currency for
interest payments in another currency.
One party swaps the interest payments of debt (bonds) denominated
in one currency (USD) for the interest payment of debt (bonds)
denominated in another currency (SF or BP), usually on a "fixed-for-
fixed rate" basis. Currency swap is used for cost savings on debt, or for
hedging long term currency risk.

12.  General Electric wants to borrow POUND
 Qantas wants to borrow USD

14. Interest Rate Swap:
 In an interest rate swap the principal is
not exchanged
Currency Swap:
 In a currency swap the principal is
usually exchanged at the beginning and
the end of the swap’s life