rm ppt swap

8/2/2019 RM PPT SWAP

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Submitted To:Prof.Pinakin

Jaiswal

Submitted By:Devang Kamdar13Roman Patel14

M.B.A II, SEMESTER - IVDr. J. K. Patel Institute ofManagement VadodaraParul Group of Institutes

Affiliated to

Gujarat Technological University

Currency Swaps andInterest rate Swaps,Interest Rate Future


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What is swap

A swap is a private agreement between two parties to

exchange one stream of cash flows for another stream

of cash flows in accordance with a pre-arranged

formula.

Agreement will provide details of how cash flows will be

calculated, and dates on which cash flows will be

exchanged

At least one party will be bare to an uncertain variable

such as interest rate, exchange rate, equity price, or

commodity price


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Currency Swap

A currency swap is one in which one party agrees to exchangepayments based on one currency with another party based onanother currency

Party A borrows in one currency, e.g. INR, and party B borrows inanother currency, e.g. USD: the loan is swapped so that party A paysthe interest in USD, and party B pays the interest in INR

In a currency swap, cash flows are exchanged in two differentcurrencies

Notional principals are the same based on current exchange rate,which are also exchanged


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Currency Risk in CurrencySwap

As periodic coupon and final exchange of notionalprincipal are in different currencies, currency riskcan arise from this

If a company has cash inflow in the swap currency,the periodic payments can be paid withoutconverting local currencycurrency risk is thus

avoided

If a company has no cash inflow in the swapcurrency, currency risk exists


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The Uses of a Currency Swap

1. To hedge currency risk; and

1. To reduce funding costs


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Interest Rate Swap

A fixed interest rate loan is exchanged for a floating interestrate loan.

Party A will borrow in the market at a fixed rate; Party B willborrow in the market at a floating rate; interest payments will

be swapped at every reset period of the floating-rate loan.

The rate at which party A will pay interest to party B and viceversa are known as swap rates, which are determined in the

market.

Principal will not be exchanged, and interest amount will becalculated on notional principal.


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Uses of the Interest Rate Swap

Hedging interest rate

Reduce funding costs

Manage the duration gap by banks

Speculating on interest rate movements


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Interest Rate Swaps: AnExample

A can borrow at either LIBOR + 70 points, or at a fixed rate of 9%

B can borrow at either LIBOR + 20 points, or at a fixed rate of 8.2%

Both can have a lower cost of funding if A borrows at LIBOR + 70,

and B borrows at a fixed rate of 8.2%, and they swap

Swap rates are fixed at 8.2%, and the floating rate at LIBOR + 5

Net cost for A will be 8.85% fixed, and for B will be LIBOR + 5 points

Both save an interest rate of 0.15%


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Interest Rate Futures

IRF will expand the scope of the financial markets &exchange traded IRF are more transparent in termsof price discovery ,margining ,risk management &settlement.

IRF will enable corporate to hedge interest rate risk. Settlement date is the last day of the month.

In India Future Contract available 10-year 7%coupon (compounded semi-annually) GOI bonds


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THANK YOU

rm ppt swap

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