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SWAP

S A K S H A M A G A R WA L

– At any time during the outstanding life of the underlying bond. • Basic Kind of Swap – Interest Rate Swap – Currency Swap • Swap can be executed – In advance of the issuance of either fixed rate or variable rate debt. or visa versa. • Issuer of swap can contract to pay a floating rate and receive a fixed rate.WHAT ARE SWAP? • A Swap is an agreement between two counterparties to exchange two streams of cash flows. .the Parties “Swap”. • Purpose is to change the character of an assets or liability without liquidation. the cash flow streams.

TYPES OF SWAP • Interest rate swap • Currency Swap • Forex Swap • Commodity Swap • Equity Swap .

• Types: – Floating for fixed – Fixed for floating – Floating for floating (basis Swap) • No exchange of principal . coupon flows only.INTEREST RATE SWAP • Interest Swap are basically exchange of interest payment between two counter parties. .

USES OF INTEREST RATE SWAP • Hedging • Speculation .

forward.FOREX SWAP • A forex swap is an agreement to exchange currencies now at the prevailing spot rate and also to exchange the currencies back in the future at the prevailing forward rate. forward forward . • Two types Forex Swap: Current.

– Payment / receipt of interest(in the same currency) on the same loan. • Principal amount is also changed at the time of swap and maturity.CURRENCY SWAP • Similar to interest rate swap but interest payments are in different currencies. • All the cash flows associated with those loans are paid: – Initial receipt / payment of loaned principal. – Ultimate return/ recovery of the principal at the end of the loan. .

• Currency Swap can be used to exploit inefficiencies in international debt market. .USES OF CURRENCY SWAP • Avoid changes in exchange rate.

E. Commodities are physical assets such as metals. in a commodity swap. Cracking spread which indicates the spread between crude prices and refined product prices significantly affect the margins of oil refineries) . • Commodity swaps are used for hedging against – Fluctuations in commodity prices or – Fluctuations in spreads between final product and raw material prices (E.g. a party may agree to exchange cash flows linked to prices of oil for a fixed cash flow. energy stores and food including cattle.g. the cash flows to be exchanged are linked to commodity prices.COMMODITY SWAPS • In commodity swaps.

he retains a voting right on the shares. promising to buy it back at market price at a future date. .EQUITY SWAPS • Under an equity swap. However. the shareholder effectively sells his holdings to a bank.