TOPIC- SWAP

Swaps

• Has Grown alot in the past 20 years

• Protection from financial risks

• Balancing operational costs

• Financing in moments of low market liquidity

Swap Dealer

• Swap contracts aren’t made with well defined rules.

• There is always some entity in the midle called Swap

Dealer.
Types of Swaps

• Interest Rate Swaps

• Currency Swaps

• Comodity Swaps

• Credit Default Swaps

• Equity Swaps
 Interest Rate Swaps

• In this kind of swap there is an exchange between fixed and

variable interest rates.

• It implies a great risk and results in great losses for one of

the parts.

• One of the parts pays the difference between the fixed and
the variable interest rate.
Interest Rate Swaps - Example

Two entities (α andβ) need funding.

• α wishes to get financed with a variable interest rate.

• β wishes to get financed with a fixes interest rate.

Interest Rate Swaps - Example
Rates offered to company α andβ

Fixed rates Variable rates

Company α 6% Euribor 3 months + 1.25%

Company β 7% Euribor 3 months + 1.50%

α gets a loan of 10 m€, at a fixed rate of 6%, for 10 years;

β gets a loan of 10 m€, at the variable rate Euribor 3 months + 1.5%,

for 10 years.
Interest Rate Swaps - Example

1. α will have a loan at a variable rate, as wished, with a rate of:

Euribor 3months + (6%-5.25%) = Euribor 3month + 0.75%
2. β will have a loan at a fixed rate, with a rate of:
5.25%+(Euribor 3months+1.5%)-Euribor 3 months = 6.75%
Interest Rate Swaps - Example
If α had a loan at a variable rate, it would pay Euribor 3months +
1.25%, meaning a profit of 0.5%;
If β had a loan at a fixed rate, it would pay 7%, meaning a profit of
0.25%.

Taxa Valor Juro

Empresa α 4.5% € 450 000

Empresa β 5.25% € 525 000

Currency Swaps

This kind of swap consists on the deal between two entities, in

the exchange for the obligations of a loan in one currency for
another loan obligations of equal net value in another
currency.
Currency Swaps - Types

• FX-Swaps

• Back-to-back

• Cross currency swaps