Swaps
- 1. Presented By: ImadAhmad Juzer Abbas Muqaddas Ali Sana Maqbool
- 2. A swap isan 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 asset or liability without liquidation Issuer of swap can contract to pay a floating rate and receive a fixed rate, or vice versa Basic kind of swaps Interest rate swap Currency swap Swaps 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 bonds
- 3. YOU Original CounterParty Swap Counter Party Cash flow Stream A Cash Flow Stream A Cash Flow Stream B
- 4. Basis Rate SwapBond Swap Commodity Swap Credit Default Swap Volatility Swap Interest Rate Swap Currency Swap Forex Swap
- 5. Interest swaps arebasically 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
- 6. Fixed Rate FloatingRate Company A 11% LIBOR + 1% Company B 10% LIBOR + 0.5%
- 7. Lender Bank BA Libor + 1% 10% 9.7% Libor 9.8% Libor Gain = 0.1% After Swap: A --- 9.8% + 1 % B --- Libor + 0.3%
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- 9. A FOREX swapis 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 type of Forex Swaps: Current – Forward ; Forward - Forward Current Jan 1 st 1 st Leg A Buy $100 @ 80 Rs/Dollar From B Forward April 1 st 2 nd Leg A will Sell $100 @ 90 Rs/Dollar to B If Market Value of Dollar is 85Rs/Dollar or 95Rs/Dollar
- 10. Current Jan 1st Swap Agreement 2 nd Leg Apr 1 st A will sell $100 @ 90 Rs/Dollar to B Market Value of Dollar Rs.85/Dollar or Rs.95/Dollar 1 st Leg Jan 15 th A will Buy $100 @ 80 Rs/Dollar From B
- 11. Similar to InterestRate Swap but interest payments are in different currencies Principle Amount is also changed at the time of swap and maturity All cash flows associated with those loans are paid: initial receipt/payment of loaned principal, payment/receipt of interest (in the same currency) on that loan, ultimate return/recovery of the principal at the end of the loan.
- 12. Corporation Lender SwapCounter Party USD Loan USD Loan AUD Loan
- 13. Avoid changes inexchange rate Currency swaps can be used to exploit inefficiencies in international debt markets.
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- 15. Interest Rate SwapLucky Cement company would receive six months T-Bills or KIBOR rates and pay fixed rates of mark-up ranging between 7.25% to 9.32%. Forex Rate Swap PARCO The Largest FX Swap in Pakistan for PARCO US$387 million through United Bank Limited.
- 16. Thank You for Your Patience