SWAPS

Dr.N.Raghavenra Rao Professor In Finance And Information Technology

INTEREST RATE SWAPS

The following terms are explicitly stated while designing an interest rate swap contract. 1.The identities of the two counterparties. 2.The date on which the last exchange of cash flows between the two parties is known as maturity of swap. 3.Calculation of the payments is done on the basis of interest rate paid by the first party.

INTEREST RATE SWAPS Contd..

4.The above interest rate may be fixed or floating. 5.Calculation of payments is done by the second party on the basis of floating rate of interest. 6.Day-count convention is used for computation of interest (30/360 days).

INTEREST RATE SWAPS Contd.

7.Frequency of payment is to be mentioned in the contract. 8.The principal is said to be notional because there is no need for the two parties to exchange the specified amount. 9.Notional amount is required to be specified for computation of interest.

CURRENCY SWAPS
1. A currency swap may be defined as a contract under which two parties commit themselves to exchange over a stated time period two streams payments in two different currencies, each using a different interest rate. 2. They also agree to exchange at the end of the stated time period, the corresponding principal amount, at an exchange rate that is agreed upon at the outset. 3. The term currency swap strictly speaking should only be used for transactions between currencies that are on a fixed-rate to fixed-rate basis.

CURRENCY SWAPS Contd.

4. Fixed-floating and floating-floating swaps involving two currencies are referred to technically as cross-currency swaps. 5. A crosscurrency coupon swap is on a fixedfloating basis, whereas a cross- currency basis swap is on a floating-floating basis. 6. One party makes payments based on a fixed rate while other party makes payments based on a floating rate, is referred as a coupon swap.