Presentation of FDRm

7/30/2019 Presentation of FDRm

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Prof. Sumit GulatiAnkit Vashishth

Puneet Srivastav


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An interest rate swap is a contractual agreement entered into betweentwo counterparties

under which each agrees to make periodic payment to the other for an

agreed period of time based upon a notional amount of principal

The principal amount is notional because there is no need to exchange

actual amounts of principal in a single currency transaction

there is no foreign exchange component to be taken account of


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An agreement between two parties

where one stream of future interest payments is exchanged for another

based on a specified principal amount.

Interest rate swaps often exchange a fixed payment for a floating

payment that is linked to an interest rate (most often the LIBOR).

A company typically use interest rate swaps to limit or manage exposure

to fluctuations in interest rates,

or to obtain a marginally lower interest rate than it would have been able

to get without the swap.


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:

In a fixed-for-floating swap agreement, one party agrees to pay the fixed leg

of the swap, with the other party agreeing to pay the floating leg of the

swap.

The fixed rate is the interest charged over the life of a loan and does notchange.

Fixed-for-floating swaps in different currencies are used to convert a fixed

rate asset/liability in one currency to a floating rate asset/liability in adifferent currency, or vice versa.


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Fixed-for-floating swaps in same currency are used to convert a fixed rateasset/liability to a floating rate asset/liability or vice versa.


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In a floating-for-floating interest rate swap agreement, both parties agree to

pay a floating rate on their respective legs of the swap.

Floating-for-floating rate swaps are used to hedge against or speculate on

the spread between the two indexes widening or narrowing.


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In fixed-for-fixed interest rate swaps, both parties agree to a fixed interest

for their respective legs of the swap.

The interest rate does not change over the life of the loan for both parties.

Investors most commonly use fixed-for-fixed interest rate swaps when they

are dealing with different currencies.

Companies often use fixed-for-fixed interest rate swaps when they are

building or expanding their business in a foreign country


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Interest rate swaps are used by a wide range of :

commercial banks

investment banks

non-financial operating companies

insurance companies

mortgage companies

investment vehicles and trusts

government agencies and sovereign states


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To obtain lower cost funding

To hedge interest rate exposure

To obtain higher yielding investment assets

To create types of investment asset not otherwise obtainable

To implement overall asset or liability management strategies

To take speculative positions in relation to future movements in interest

rates.


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Companies dont have to liaise directly with another company, banksintermediate.

They can be used to lock into an interest and exchange rate for longerperiods.

They do not require frequent monitoring and reviewing.

Used to hedge against adverse interest rate fluctuations.

Premiums paid are lower than options.

They are more flexible than options and futures.


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Banks decrease the benefit companies receive from the transaction

Company can default on interest payments i.e. counter party risk yet bank

intermediation should reduce this

A company with absolute advantage over another company can become

worse off in the SWAP deal

It is advisable to trade only with companies that have good credit ratings


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THANK YOU

Presentation of FDRm

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