SWAP IN FINANCE

• However investopedia define swap as an agreement

between two parties to exchange sequences of cash flows
for a set period of time
 In financial swaps, the contracting parties (counterparties)
make exchanges, which are separated in time and reverse
each other. Such an exchange is generally arranged
through an intermediary commercial bank or investment
bank serving as a broker or dealer.
 During the 1960s, for example, the U.S. government
frequently arranged intergovernmental currency swaps
for the defense of the dollar.
 Private firms have long used swaps known as parallel
loans or back-to-back loans to circumvent exchange
controls and reduce their forex exposures.
 There is always a fixed tenor.
 One party pays fixed whilst while the other pays
floating or both parties may have to pay floating.
 There is an underlying notional principle (specified as
an amount of a commodity in a commodity swap,
specified as a stock portfolio in an equity swap).
 Swaps are not exchange traded instruments
 customized contracts traded in the over- the counter
(OTC) market between private parties
 Swaps market are dominated by firms and financial
institution
 Always a risk of counterparty defaulting on the swap
 First interest rate happened in 1981 between World Bank
and IBM
Types of swaps are:
1. Interest Rate Swap(Main),

2. Currency Swaps

3. Commodity Swaps

4. Equity Swaps

5. Credit Swaps/Credit Derivatives

6. Weather Derivatives
 Main type of IRS is Currency swap
 Some are short term ,while some are long term
 Most common and simplest swap
 Life cycle :

1.Trade Date

2. Start Date

3.Value Date

4.Refixing Date

5.Effective Date

6.Maturity Date
1. Financial Dictionary: financial-dictionary.com [Online]. 2012 [cit. 2012. 02.
28]
From <http://financial-dictionary.thefreedictionary.com/Swap>

2. Investopia: investopia.com [Online]. 2012 [cit. 2012. 02. 24]

From<
http://www.investopedia.com/articles/optioninvestor/07/swaps.asp#a
xzz1qrAPtTA2
>

3. United Nations: un.org [Online]. 2012 [cit. 2012 02. 16]

Fromhttp://search.un.org/search?
q=swap+finance&spell=1&ie=utf8&site=un_org&output=xml_no_dtd&cl
ient=UN_Website_en&num=10&lr=lang_en&proxystylesheet=UN_Websi
te_en&access=p

4. World Bank: worldbank.org [Online]. 2012 [cit. 2012. 02. 24]

From<http://search.worldbank.org/all?qterm=swaps%20>