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    RM PPT Swap

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    pankajkubadiya
    This document discusses various types of interest rate and currency swaps. It defines a swap as a private agreement between two parties to exchange cash flows. It describes how a currency swap works, where parties exchange interest payments in different currencies to hedge currency risk. An interest rate swap is described as exchanging a fixed interest rate loan for a floating rate loan to allow parties to borrow at lower costs. Interest rate futures are also discussed as enabling corporations to hedge interest rate risk by trading government bond contracts on an exchange.

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    RM PPT Swap

    Uploaded by

    pankajkubadiya
    90 views10 pages
    This document discusses various types of interest rate and currency swaps. It defines a swap as a private agreement between two parties to exchange cash flows. It describes how a currency swap works, where parties exchange interest payments in different currencies to hedge currency risk. An interest rate swap is described as exchanging a fixed interest rate loan for a floating rate loan to allow parties to borrow at lower costs. Interest rate futures are also discussed as enabling corporations to hedge interest rate risk by trading government bond contracts on an exchange.

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    RM PPT SWAP

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    This document discusses various types of interest rate and currency swaps. It defines a swap as a private agreement between two parties to exchange cash flows. It describes how a currency swap works, where parties exchange interest payments in different currencies to hedge currency risk. An interest rate swap is described as exchanging a fixed interest rate loan for a floating rate loan to allow parties to borrow at lower costs. Interest rate futures are also discussed as enabling corporations to hedge interest rate risk by trading government bond contracts on an exchange.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    90 views10 pages

    RM PPT Swap

    Uploaded by

    pankajkubadiya
    This document discusses various types of interest rate and currency swaps. It defines a swap as a private agreement between two parties to exchange cash flows. It describes how a currency swap works, where parties exchange interest payments in different currencies to hedge currency risk. An interest rate swap is described as exchanging a fixed interest rate loan for a floating rate loan to allow parties to borrow at lower costs. Interest rate futures are also discussed as enabling corporations to hedge interest rate risk by trading government bond contracts on an exchange.

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    You are on page 1of 10

    Currency Swaps and Interest rate Swaps, Interest Rate Future

    Submitted To: Prof. Pinakin Submitted By: Devang Kamdar 13 Roman Patel 14

    Jaiswal

    4/27/12

    M.B.A II, SEMESTER - IV Dr. J. K. Patel Institute of Management Vadodara Parul Group of Institutes Affiliated to Gujarat Technological University

    What is swap

    A swap is a private agreement between two parties to exchange one stream of cash flows for another stream of cash flows in accordance with a pre-arranged formula. Agreement will provide details of how cash flows will be calculated, and dates on which cash flows will be exchanged At least one party will be bare to an uncertain variable such as interest rate, exchange rate, equity price, or commodity price

    4/27/12

    Currency Swap

    A currency swap is one in which one party agrees to exchange payments based on one currency with another party based on another currency Party A borrows in one currency, e.g. INR, and party B borrows in another currency, e.g. USD: the loan is swapped so that party A pays the interest in USD, and party B pays the interest in INR In a currency swap, cash flows are exchanged in two different currencies Notional principals are the same based on current exchange rate, which are also exchanged

    4/27/12

    Currency Risk in Currency Swap

    As periodic coupon and final exchange of notional principal are in different currencies, currency risk can arise from this If a company has cash inflow in the swap currency, the periodic payments can be paid without converting local currencycurrency risk is thus avoided If a company has no cash inflow in the swap currency, currency risk exists

    4/27/12

    The Uses of a Currency Swap


    1.

    To hedge currency risk; and To reduce funding costs

    1.

    4/27/12

    Interest Rate Swap

    A fixed interest rate loan is exchanged for a floating interest rate loan. Party A will borrow in the market at a fixed rate; Party B will borrow in the market at a floating rate; interest payments will be swapped at every reset period of the floating-rate loan. The rate at which party A will pay interest to party B and vice versa are known as swap rates, which are determined in the market. Principal will not be exchanged, and interest amount will be calculated on notional principal.

    4/27/12

    Uses of the Interest Rate Swap

    Hedging interest rate Reduce funding costs Manage the duration gap by banks Speculating on interest rate movements

    4/27/12

    Interest Rate Swaps: An Example A can borrow at either LIBOR + 70 points, or at a fixed rate of 9%
    B can borrow at either LIBOR + 20 points, or at a fixed rate of 8.2% Both can have a lower cost of funding if A borrows at LIBOR + 70, and B borrows at a fixed rate of 8.2%, and they swap Swap rates are fixed at 8.2%, and the floating rate at LIBOR + 5 Net cost for A will be 8.85% fixed, and for B will be LIBOR + 5 points Both save an interest rate of 0.15%

    4/27/12

    Interest Rate Futures

    IRF will expand the scope of the financial markets & exchange traded IRF are more transparent in terms of price discovery ,margining ,risk management & settlement. IRF will enable corporate to hedge interest rate risk. Settlement date is the last day of the month. In India Future Contract available 10-year 7% coupon (compounded semi-annually) GOI bonds

    4/27/12

    THANK YOU

    4/27/12

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