SWAP

S A K S H A M A G A R WA L

WHAT ARE SWAP?

A Swap is an agreement between two counterparties to
exchange two streams of cash flows- the Parties Swap, the
cash flow streams.
Purpose is to change the character of an assets or liability
without liquidation.
Issuer of swap can contract to pay a floating rate and receive a
fixed rate, or visa versa.
Basic Kind of Swap
Interest Rate Swap
Currency Swap

Swap can be executed

In advance of the issuance of either fixed rate or variable rate debt.
At any time during the outstanding life of the underlying bond.

TYPES OF SWAP
Interest rate swap
Currency Swap
Forex Swap
Commodity Swap
Equity Swap

INTEREST RATE SWAP

Interest Swap are basically exchange of interest
payment between two counter parties.
Types:
Floating for fixed
Fixed for floating
Floating for floating (basis Swap)

No exchange of principal ; coupon flows only.

USES OF INTEREST RATE

SWAP
Hedging
Speculation

FOREX SWAP
A forex swap is an agreement to exchange currencies
now at the prevailing spot rate and also to exchange
the currencies back in the future at the prevailing
forward rate.
Two types Forex Swap: Current- forward; forward forward

CURRENCY SWAP
Similar to interest rate swap but interest payments are
in different currencies.
Principal amount is also changed at the time of swap
and maturity.
All the cash flows associated with those loans are paid:
Initial receipt / payment of loaned principal;
Payment / receipt of interest(in the same currency) on the
same loan;
Ultimate return/ recovery of the principal at the end of the
loan.

USES OF CURRENCY SWAP

Avoid changes in exchange rate.
Currency Swap can be used to exploit inefficiencies in
international debt market.

COMMODITY SWAPS
In commodity swaps, the cash flows to be exchanged are
linked to commodity prices. Commodities are physical assets
such as metals, energy stores and food including cattle. E.g.
in a commodity swap, a party may agree to exchange cash
flows linked to prices of oil for a fixed cash flow.
Commodity swaps are used for hedging against
Fluctuations in commodity prices or
Fluctuations in spreads between final product and raw material
prices (E.g. Cracking spread which indicates the spread between
crude prices and refined product prices significantly affect the
margins of oil refineries)

EQUITY SWAPS
Under an equity swap, the shareholder effectively sells
his holdings to a bank, promising to buy it back at
market price at a future date. However, he retains a
voting right on the shares.