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Introduction To Swaps
It is an exchange contract between
two parties for two instruments of different yields, interest rates & currencies for the same amount.
A swap is equivalent to a portfolio, or
strip, of forward contracts--each with a4/23/12 different maturity date, and each
Mechanics of Swaps
Swap agreement is an exchange of cash flows
fixed interest rate on a notional principal amount in exchange for the other party paying a floating rate on the same notional principal amount for a set period of time.
In this case the currency of the agreement is the
Pricing of Swaps
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Advantages of Swaps
A Swap is flexible. It allows you to tailor the
Disadvantages of Swaps
You effectively lock in a fixed interest rate. This
Types of Swaps
There are two types of swaps:
1. Interest rate swap an exchange of fixed-
swap buyer
Counterparty B is called the floating rate payer or
swap seller
Counterpa rty A
Counterpa rty B
Floating rate payments
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Interest Rate Swaps: Common Uses rate swaps to Corporations employ interest
dynamically change their financing structure from floating rate exposure to fixed, and vice versa.
If interest rates are projected to rise, swaps
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Currency Swaps
A currency swap is an agreement between two
parties to exchange a series of payments at specific dates in which one series of payments is in one currency and the other is in another currency.
Payments are based on the interest rates in two
countries.
Interest payments are calculated based on a fixed
Currency swap
There are four types of basic currency swaps:
fixed for fixed. fixed for floating. floating for fixed. floating for floating.
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of a Foreign Currency.
To convert a liability in one currency into a liability
in another currency.
To convert an investment (asset) in one currency to
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