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PRESENTATION

ONSWAP

Presented By:Anjali Dwivedi

Aparna

Deepika yadav

Garima JainPavitra Panwar

Poonam Upadhyay

Poonam kajal

Seema Dhankar

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INTRODUCTION TO

SWAPSA swap is an agreement between two parties to

exchange (swap) payments at certain dates in the

future.

Counterparty A CounterpartyB

As payments to B

Bs payments to A

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DEFINITION

A Swap is defined as a financial transaction in

which two counterparties agree to exchange streams

of payments, or cash flows, over time on the basis

agreed at the inception of the agreement. Thus aSwap is like a series of forward contracts.

Swap is nothing but exchange of liabilities betweentwo parties.

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DESCRIPTION

The payments can be :-

Different currencies (currency swap)

Different interest payments (coupon swap)

Payment dates are fixed at settlement and extend

until a fixed expiration date.

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ADVANTAGES

Swap is an instrument used for the exchange ofstream of cash flows to reduce risk.

The advantages of swaps are as follows:

1) Swap is generally cheaper. There is no upfrontpremium and it reduces transactions costs.

2) Swap can be used to hedge risk, and long time

period hedge is possible.

3) It provides flexible and maintains informationaladvantages.

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CONT.

4) It has longer term than futures or options. Swaps willrun for years, whereas forwards and futures are for

the relatively short term.

5) Using swaps can give companies a better match

between their liabilities and revenues.

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DISADVANTAGES

The disadvantages of swaps are:

1) Early termination of swap before maturity may

incur a breakage cost.2) Lack of liquidity.

3) It is subject to default risk

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CURRENCY SWAPS

A currency swap entails an exchange of payments in

different currencies.

A currency swap is equivalent to borrowing in one

currency and lending in another.

They involve exchange of cash flows in twocurrencies. The exchange rate generally used is the

ruling spot rate.

It is also used to raise funds in the market (currency,interest rate, etc.) in which it has a comparative

advantage and use currency and / or interest rate

swaps to achieve the desired liability portfolio, at a

lower cost than otherwise. 8

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CONT..

It involves the following: Exchange the equivalent amount of different currencies.

Exchange periodic interest payments during the lifeof the swap.

Re exchange of principal sum at predetermined rate onthe maturity of the swap.

These amounts will be re exchanged atpredetermined rates at the maturity of the currency swap.

The parties will service the loans in the respective

currencies.

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ELEMENTS OF CURRENCY

SWAP

There are several important element in a currency

swap that must be agreed between the two parties:

The period of the agreement.

The two currencies involved.

The principal amount of each currency, and the

exchange rate.

The basis for exchange of interest rate payments. Whether or not there will be an exchange of

principal at the near-value date.

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BENEFITS OF CURRENCY SWAP

Help portfolio managers regulate their exposure to

interest rates.

Speculators can benefit from a favorable change in

interest rates. Reduce uncertainty associated with future cash flows

as it enables companies to modify their debt

conditions.

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CONT

Reduce costs and risks associated with

currency exchange.

Companies having fixed rate liabilities can

capitalize on floating-rate swaps and vise

versa, based on the prevailing economic

scenario.

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LIMITATIONS OF CURRENCY

SWAP

The drawbacks of currency swaps are:

Exposed to credit risk as either one or both the parties

could default on interest and principal payments.

Vulnerable to the central governments interventionin the exchange markets. This happens when the

government of a country acquires huge foreign debts

to temporarily support a declining currency. This

leads to a huge downturn in the value of the domestic

currency.

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TYPES OF CURRENCY

SWAP

There are four types of basic currency swap:

fixed for fixed.

fixed for floating. floating for fixed.

floating for floating.

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EXAMPLES OF CURRENCY

SWAPExample 1

Company A is doing business in USA, and it has

issued a $20 million dollar-denominated bond toinvestors in the US. Company B is doing business inEurope, and It has issued a bond of $ 15 MillionEuros. The two companies can enter into an

agreement to exchange the principal and interest ofthe bonds. The $15 million Euro-denominated bondwill be the obligation of company A, and company Bwill be obligated to the $20 million bond.

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Suppose one USA company wants to start hisfactory in India. For this it gets $10 billiondollar in the form of loan from USA market

and Exchanges this amount from Indiacompany B. Now company A has Indiancurrency for doing business in India andcompany B which is Indian company has USA

currency and it can get Forex earning. Itmeans that both are benefited with single dealof currency swap.

Example 2

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Example 3

An agreement to pay 1% on a Japanese Yen principal

of 1,040,000,000 and receive 5% on a US dollar

principal of $10,000,000 every year for 3 years.

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CURRENCY SWAP

ROI in $Principle in $

Party A

On maturity ofcontract

Principle in

EUROROI in EURO

Party B

Swap of ROI of different currency

Plus

Swap of currency at original spot rate

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VALUATIONOF CURRENCYSWAP

Currency swaps can be valued either as the

difference between 2 bonds or as a portfolio of

forward contracts.

Fixed by fixed currency swap is valued as the

difference between the two fixed rate bonds,

valued in a common currency.

The Principal of bonds such that they have the

same value at time zero.

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CONT

Fixed by floating currency swap is valued as

the difference between a fixed and floating

bond, valued in a common currency.

The Principal of bonds such that they have the

same value at time zero.

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