BHARAT MUNIM 35

MAHUL NAGDA 36
PRANAY NARVEKAR 38
DOLLY PAREKH 39

INTEREST RATE SWAPS AND

CURRENCY SWAPS
AGENDA

 Swap in Merger

 Swap Overview

 Interest Rate Swaps

 Currency Swaps
SWAP RATIO IN MERGERS

 It’s a mutual agreement between companies for exchange of shares

or any other assets and liabilities.
 To determine a fair value of exchange between the companies.
 Actual worth of the company is determined through intrinsic value
of the companies.
 The intrinsic value gets distributed over the equity shareholders.
(VPS)
 Swap ratio is determined by comparing the VPS of both the
companies.
 HP COMPAQ
INTRINSIC VALUE $50 billion $31.5 billon

NO. OF EQUITY SHARE 1 billion 1billion

HOLDERS
VALUE PER SHARE $50 $31.5

SWAP RATIO 1 0.63

1 share 0.63 share

HP HPQ COMPAQ
SWAPS
 Agreement between 2 parties to exchange
cash flows in future

 Riskiness of the transactions

 First swap- negotiated in 1980’s

Interest Rate Swaps
 Exchange of a stream of interest payments
for other party’s stream of cash flows.

 Used by hedgers

 Used by speculators

 Highly liquid instruments

 Structure of Interest Swaps:
 Illustration:
• A hypothetical 3-year swap initiated on March 5, 2010.
• Semi-annual interest payments.
• Tata Motors Ltd agrees to pay Maruti Udyog Ltd a fixed
interest rate of 8% per annum.
• Maruti agrees to pay 6-month LIBOR rate to Tata.
• Notional principle amount of Rs 100 crores.

LIBOR Tata
Maruti Motors
Udyog Ltd Ltd
8.00%
 TABLE 1: CASH FLOWS (IN LAKH RS.) TO TATA MOTORS
LTD. IN A RS. 100 CRORE 3- YEAR INTEREST RATE SWAP
WHEN A FIXED RATE OF 8% IS PAID AND LIBOR IS
RECEIVED.
Date 6-months Floating cash Fixed Cash flow Net cash flow
LIBOR rate flow received received
(%)
March, 5, 2010 7.6%

September 5, 2010 7.8% +380 -400 -20

March, 5, 2011 8.0% +390 -400 -10

September 5, 2011 8.1% +400 -400 0

March, 5, 2012 8.2% +405 -400 +5

September 5, 2012 8.4% +410 -400 +10

March, 5, 2013 8.5% +420 -400 +20

 Using a swap to transform a liability

8.00%
8.3% LIBOR+0.2%
Maruti Tata
Udyog Ltd Motors Ltd
LIBOR
 Using a swap to transform an asset:
The process remains the same.

8.3% LIBOR+0.2%
Maruti Udyog 8.00% Tata Motors
Ltd Ltd
LIBOR
 Role of Financial Intermediaries:

LIBOR
8.3% LIBOR LIBOR
Maruti Tata +0.2%
HDFC Bank
Udyog Ltd Motors Ltd
7.985% 8.015%
Currency Swap

 Overview

 Structure

 Illustration
Meaning
 Agreement to exchange loan

 Long term financing or hedging technique

 Right to offset Non-payment

Structure
 Principal Only

 Principal and Interest

 Interest Only
Properties
 It is a series of Forward Contracts.
 A currency swap is not a loan therefore does
not changes the liability structure of the
parties.
 There is an exchange of Principal(unlike for
interest rate swaps)
 The initial value of the contract is Zero.
Currency Swap Example
US Euro
Bond Bond
Mkt. Mkt
40m
$52m
euro@6
@8%(5yrs)
%(5yrs)

Microsoft Swap Bank LuftahnsaAirlines

(US MNC) (F.I) (German MNC)

Microsoft
Luftahansa 2.4mEuro $4.16m (German
(US Subs)
$52m Subs)
Important Aspects of Currency Swap

 Principal Exchange-Directly
 Interest Exchange through Swap Bank
 Comparative Advantage
 US Co. saves 1% on $5,20,000 over 5 yrs
 German Co. saves 1% on 4,00,000 Euro over
5 yrs
Uses
 Secure Cheaper Debt

 Hedge against risk

Valuation of currency swap

 Valuation with an e.g.

 Other currency swaps (cross currency swap)

Thank You