Development of the Swaps Market Joseph Di Peri Stephen Asai.
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Development of the Development of the Swaps Market Swaps Market Joseph Di Peri Stephen Asai
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Transcript of Development of the Swaps Market Joseph Di Peri Stephen Asai.
Development of the Swaps Development of the Swaps MarketMarket
Joseph Di PeriStephen Asai
OutlineOutlineDiscussion of currency swapBrief review of an interest rate
swapGrowth of secondary marketOther types of swapsFinancial intermediariesCredit default swaps
Introduction to currency Introduction to currency swapswap
How they work◦Plain vanilla currency swap
First swap conductedFirst swap conductedWorld Bank and IBM
◦Occurred in 1981◦Currency swap through Salomon
Brothers◦German, Swiss, and U.S markets
impact◦March 1980, the exchange rate was
1.93 DM/US dollar. August 1981, the rate was 2.52 DM/US dollar. 100 DM coupon payments were $51.81 and
after the exchange rate gains it was $36.68.
IBM – World Bank swapIBM – World Bank swap
DEM & CHFbondholders
USD Eurobondholders
IBM WB
USD service
DEM & CHF service
USDDEM & CHF
Interest rate swapInterest rate swap
How it works◦Plain vanilla interest rate swap
Other examples of swapsOther examples of swapsSallie Mae and IT&T Financial
Corporation◦Occurred in 1982◦First major domestic interest rate
swap◦“Plain vanilla” swap
Sears & Roebuck◦Hedged against interest rate risk◦Secondary market helped the use of
the swap
Overview of swapsOverview of swapsDifferences between an interest
rate swap and a currency swap◦Notional principal amount◦Players involved
Benefits of the Swap◦Achieve lower cost of financing debt◦Hedging against risks
Secondary marketSecondary marketThree main functions
◦Reverse a position◦Sell a swap to another party◦Buy out counterparty
Swaption◦An option to enter a swap
Enter a normal swap Enter an offsetting swap
Other types of swapsOther types of swapsAmortizing, accrediting, roller-
coaster
Forward start swap
Basis rate swap
Credit default swap
Growth of the swaps Growth of the swaps marketmarket
Possible reasons for growthPossible reasons for growth
Hedge against interest rate risk
Efficiency compared with futures
Arbitrage opportunities
Access to different markets
Intermediaries evolveIntermediaries evolveBanks began strictly as brokers
between two partiesBegan to fill in swap principal
differences◦Example
Bid to Ask spreads narrowed, which meant banks would need to increase the volume of swaps to profit off of swaps
Credit default swapCredit default swapRecent Development
◦Took interest rate and currency swaps ~17 years to reach same notional principal amount as CDSs did in 7 years
Notional Amount Outstanding
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
SummarySummaryIBM & World Bank currency swapWhy companies use the swapSecondary marketDifferent types of swapsRole of financial intermediariesCurrent state of swap market
Questions?
