Interest Rate Swaps

QUOTE AND NEWS  Oct 28  Comment 
National Australia Bank grants CYBG a £1.7bn indemnity against any further compensation for PPI or mis-selling of interest rate swaps Clydesdale and Yorkshire banks are to be floated on the stock market next year in a move that could pave the...
Mondo Visione  Oct 27  Comment 
Korea Exchange (KRX) has amended OTC Derivatives Clearing and Settlement Business Regulation and Enforcement Rules* in order to expand the range of clearing eligible transactions for KRW Interest Rate Swap as a part of follow-up measures of...
Financial Times  Oct 13  Comment 
Market dislocation occurs between Treasuries and interest rate swaps
Mondo Visione  Oct 8  Comment 
TriOptima announces today that 18 participants eliminated $1.6 trillion Canadian Dollar (CAD) in LCH.Clearnet’s SwapClear. This represents 20% of the interdealer CAD notional outstanding in CAD cleared interest rate swaps in the clearinghouse...
Mondo Visione  Oct 7  Comment 
ICAP plc (IAP.L), a leading markets operator and provider of post trade risk mitigation and information services, announces today that ICAP’s Global Broking business and ICAP Information Services (IIS), the information and data division of...
Mondo Visione  Sep 7  Comment 
Eurex Clearing, one of Europe's leading clearinghouses and part of Deutsche Börse Group, has admitted another major participant for EurexOTC Clear – the German Bund represented by the Bundesrepublik Deutschland – Finanzagentur GmbH (the...
Mondo Visione  Aug 31  Comment 
The Johannesburg Stock Exchange (JSE), the continent’s largest exchange, today have officially launched JSE Eris Interest Rate Swap (IRS) Futures. The new JSE Eris Interest Rate Swap (IRS) Futures will be based on the Johannesburg Interbank...
Mondo Visione  Aug 19  Comment 
CFTC's Weekly Swaps Report has been updated, and is now available. The CFTC Swaps Report provides a detailed weekly snapshot of the gross notional outstanding as of the penultimate Friday prior to the CFTC Swaps Report’s Wednesday...
Mondo Visione  Aug 12  Comment 
CFTC's Weekly Swaps Report has been updated, and is now available. The CFTC Swaps Report provides a detailed weekly snapshot of the gross notional outstanding as of the penultimate Friday prior to the CFTC Swaps Report’s Wednesday...
Mondo Visione  Aug 5  Comment 
CFTC's Weekly Swaps Report has been updated, and is now available. The CFTC Swaps Report provides a detailed weekly snapshot of the gross notional outstanding as of the penultimate Friday prior to the CFTC Swaps Report’s Wednesday...


The chart on the left is the 3 month interest rate swap.

Interest rate swaps are a common type of derivative security, which simply means that their value is “derived” from underlying assets (in this case, loans and interest rates). In a swap, two parties agree to exchange two streams of cash flow; in an interest rate swap, these cash flows are the interest payments for some given amount of money. The underlying money, known in this context as the notional amount, doesn't necessarily change hands. The two parties just exchange the interest payments they would make if they had actually borrowed the notional amount.

There are three main types of interest rate swaps, as determined by the type of rates being swapped:

  • Fixed-for-fixed swaps involve the exchange of interest payments that both carry fixed rates determined before the contract takes effect. Since there's no variability in either of the two rates, the payments will remain the same over the life of the swap contract. Fixed-for-fixed swaps are used when each party uses a different currency.
    • For example, suppose there are two companies in different countries, each of which wants to borrow money to build facilities in the other country, and that both can borrow at a lower interest rate in their home country. In this case, the companies can borrow money in their respective countries and swap with each other, essentially borrowing for each other. Each saves money by taking advantage of the other firm's lower cost of borrowing while also dodging currency conversion costs.
  • Fixed-for-floating, or "vanilla" swaps, commonly used as a type of investment, involve the exchange of a fixed interest payment for a floating interest payment. The payment with the fixed rate (known as the swap rate) doesn't change, while the payment with the floating rate is linked to some outside index (such as the LIBOR) and rises and falls throughout the duration of the contract.
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    • This type of swap can be used if a company wants to trade the floating rate on its debt for the stability of a fixed rate. In the example, Firm A has a floating rate loan but pays a fixed rate to Firm B. Firm B receives a fixed payment from Firm A and pays it a variable payment in return, which Firm A then pays to its lender. In this case, Firm A thinks that interest rates will rise and hopes to avoid higher payments by trading for a fixed rate. Firm B, on the other hand, probably thinks that rates will fall; if it's right, it will pay out less than the fixed amount it receives from Firm A, making a profit off the difference.
  • Floating-for-floating, or "Basis" swaps, as the name implies, involve the trade of interest payments that both have floating rates. The rates are based on different indexes, so each party is betting that either their original rate will rise, the other party's original rate will fall, or some combination of the two.

Interest rate swaps are traded over the counter (OTC), most commonly on fixed income desks at investment banks. Because they are not traded on open exchanges, interest rate swaps are not regulated by any government agency, so parties have a great deal of flexibility when setting the terms of the swap. Globally, the total notional amount of interest rate swaps outstanding was $309.6 trillion USD as of December 2007, accounting for 52% of the total OTC market.[1]

Interest Rate Swaps on Wikinvest


  1. Semiannual OTC derivatives statistics at end-December 2007 - Bank for International Settlements
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