Submitted to: Mr.Bhanu Partap Singh.

Submitted By: Nitin Mahindroo.

Swaps are termed as private agreements between the two parties to exchange cash flows in the future according to a prearranged formula. A swap is an agreement to exchange payments of two different kinds in the future, it is also called financial swaps in the global markets.

Counter parties: All swaps involve the exchange of a series of periodic payments between at least two parties. It means, for a swap agreement, there must be two parties who are ready to exchange their liabilities with each other.

Transaction costs: The transaction costs are relatively low in swaps transaction in comparison to loan agreements. They are unlikely to exceed half percent of total sum involved in the swap contract.

Benefits to parties: Swap agreements will be done only when the parties will be benefited by such agreement, other-wise such deals will not be excepted. Termination: Since swap is an agreement between two parties, therefore, it cannot be terminated at ones instance. The termination also requires to be accepted by counter parties. Default risk: The problems of potential default by either of the counter party exist, hence, making them more risky products as compared to futures & options.

InterestRate Swaps

Currency Swaps

Equity Swaps

An interest rate swap is a financial agreement between two parties who wish to change the interest payments or receipts in the same currency on assets or liabilities to a different basis. There is no exchange of principal amount in this swap. It is an exchange of interest payment for a specific maturity on a agreed upon notional amount. Notional: refers to the theoretical principal underlying swap.

Plain vanila swap: It is also known as fixed-for-floating swap, one party with a floating interest rate liability is exchanged with fixed rate liability. Usually swap period ranges from 2 years-15 years for a pre-determined notional principal amount.

Zero Coupon To Floating: The holders of zero-coupon bonds get the full amount of loan and interest accrued at the maturity of the bond. Hence, in this swap, the fixed rate player makes a payment at the end and floating rate player makes a periodic payment through the swap period.

Forward Swap: This swap involves an exchange of interest rate payment that does not begin until a specified future point in time. It is also kind of swap involving fixed for floating interest rate.

Rate-capped swap: There is exchange of fixed rate payments for floating rate payments, whereby the floating rate payments are capped. An upfront fee is paid by floating rate party to fixed rate party for the cap.

One of the oldest technique used in swap market. In this swap, the two payments streams being exchanged are denominated in two different currencies. For eg:, a firm which has borrowed Japanese yen at a fixed interest rate can swap away the exchange rate risk by setting up a contract whereby it receives yen at a fixed rate in return for dollars at either a fixed or a floating interest rate. Currency swaps are also used to lower the risk of currency exposure or to change returns on investment into another, more favourable currency.

In currency swap normally three basic steps are involved which are:

Initial exchange of principal amount-at an agreed rate of exchange. This rate is based on the spot exchange rate. The counter parties simply convert principal amounts into the required currency by spot market.

Ongoing exchange of interest-after establishing the principal amounts, the counter parties exchange interest payments on agreed date on the outstanding principal amounts at a fixed interest rates. The third step is the re-exchange of principal amounts to maturity-agreement on this enables the counterparties to re-exchange the principal sums at the maturity dates.

Equity swaps are used to hedge the downside risk of the market.

Equity swaps involve a counterparty exchanging scheduled payments based on the total return, including the capital appreciation and dividend, of a market index for fixed rate payments.
The notional principal, tenor and payment schedule are specified.

A debt/equity swap is used as a refinancing deal in which a debtor gets an equity position in exchange for cancellation of the debt. The swap is generally done to help a struggling company continue to operate.

Thank You.......