intest rate swaps - copy
TRANSCRIPT
Interest rate
swaps
Origin of swaps
Swaps market can traced to the late 1970, British controls on the movement of foreign currency. The 1st interest rate swap occurred in 1981agrement b/w IBM & World Bank.
INTEREST RATESWAPS
An interest rate swap is a contractual agreement entered into b/w two counterparties under which each agrees to make periodic payment to the other for an agreed period of time
SWAPS CAN BROADLY BE CLASSIFIED INTO TWO TYPES
1.Fixed to floating
2.Floating to floating
TYPES OF INTEREST RATE SWAPS
1.Basis swaps2.Forward swaps3.Rate capped
swaps4.Deferred rate
swaps5.Callable swaps
HOW IT WORKS/EXAMPLE
1.Fixed rate 2.Folting rate 3.National amount (np)4.London interbank offered rate (LIBOR)
HOW IT WORKS/EXAMPLE
A)Assume that Charlie owns
Investment = $1,000,000
National Interest = LIBOR + 1% every month.
payment = Charlie receives changes.
B)Assume that Sandy owns
Investment = $1,000,000 Interest = 1.5% every month. payment = Sandy receives never changes.
LIBOR goes up and down
HOW IT WORKS/EXAMPLEScenario A: LIBOR = 0.25% Charlie:- ($1,000,000 x (0.25% + 1%))
$12,500 Sandy :- ($1,000,000 x 1.5%) $15,000
Sandy owes Charlie the difference: $2,500.
HOW IT WORKS/EXAMPLE
HOW IT WORKS/EXAMPLE Scenario B: LIBOR = 1.0% Charlie :- ($1,00,000 x (1% + 1%)) $20,000 Sandy:- ($1,000,000 x 1.5%) $15,000
Charlie owes Sandy the difference : $5,000.
HOW IT WORKS/EXAMPLE
HOW IT WORKS/EXAMPLE
Interest rate swaps provide a way for businesses to hedge their exposure to changes in interest rates.
UR’S MANJUNATH
THANQ U….
INTEREST:- You only do it when it’s CONVENIET
COMMIT:- No excuses, only RESULTS