A swap is an agreement between two parties to exchange cash flows over a period of time, where at least one cash flow is determined by a variable such as interest rate, foreign exchange rate, or equity price. The most common type is an interest rate swap, where parties exchange interest payments on a notional principal amount at fixed and floating rates. Swaps allow users to align the risk characteristics of their assets and liabilities.

1. SwapS

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.

4. Interest rate
swaps
Currency
swaps
SWAPS

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 .

7. Floating rate
Fixed rate
Mechanism of IRS :

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.