Interest Rate Swaps

QUOTE AND NEWS
Mondo Visione  Dec 3  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  Dec 3  Comment 
The Financial Markets Authority (FMA) said today it has reached a settlement with ANZ Bank New Zealand Limited (ANZ) regarding the sale, promotion and marketing of rural interest rate swaps to rural customers.  The settlement follows an FMA...
Mondo Visione  Nov 26  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  Nov 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  Nov 14  Comment 
Global Derivatives Indices (GDI), a wholly owned subsidiary of Global Markets Exchange Group International LLP (GMEX Group), today announced a strategic partnership with Tradition, the interdealer broking arm of Compagnie Financière Tradition, to...
Mondo Visione  Nov 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...
newratings.com  Nov 6  Comment 
WASHINGTON (dpa-AFX) - Annaly Capital Management, Inc. (NLY) reported third-quarter net income to shareholders of $336.86 million or $0.36 per share, up from $174.47 million or $0.18 per share in the prior-year quarter. The company noted that the...
Mondo Visione  Nov 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...
Mondo Visione  Nov 3  Comment 
Global Derivatives Indices (GDI), a wholly owned subsidiary of Global Markets Exchange Group International LLP (GMEX Group), today announced a strategic partnership with Tradition, the interdealer broking arm of Compagnie Financière Tradition, to...
Mondo Visione  Oct 29  Comment 
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 publication date, as well as a detailed weekly total of the transaction volume...




 
TOP CONTRIBUTORS

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

References

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