Interest rate swaps

Manjunat

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PRESENTED BY

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.

THANQ U….

UR’S MANJUNATH

INTEREST:- you only do itWhen it’s convenient

COMMIT:- No excuses, only RESULTS