FINANCIAL SWAPS

NAME ROLL NO

PANKHURI KHATRI 36
RAVI KHUSHALANI 37
TEJAS SATIKUVAR 77
MRINAL SEN 78
1 AKSHAY SHAH 79
 FINANCIAL SWAPS
 INTRODUCTION

 EXAMPLE

 USES

 TYPES

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 INTEREST RATE SWAP
 Basic Feature: Two entities know as counter-
party, exchange the interest payment as if they
have taken the loan of their choice (i.e. fixed or
floating)

 Essential
Condition:
 The amount of loan should be identical

 There must be synchronisation

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EXAMPLE:

Principal
Fixed-rate loan market
Principal
Floating-rate loan market

Firm B
Firm A
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 9.50%
Fixed-rate loan market
Libor + 0.3%
Floating-rate loan market

9.75% 9.65%
Firm B
Firm A Swap Dealer

LIBOR LIBOR 5
 Impact and Benefit:
 Save’s cost of borrowing.
 Hedging interest rate risk.

 Variants in Interest rate Swap:

 Zero Coupon swap
 Floating-for-floating rate swap
 Fixed-for-fixed rate swap
 Option swap
 Callable, Putable, Extendable swaps.
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 CURRENCY SWAP
Currency swap involves the exchange of currency.
The exchange of currencies is necessitated by the fact that one
counter-party is able to borrow a particular currency at a lower
interest than the other counter-party is able to borrow.
If firm B needs fixed rate Euro, it will approach the swap dealer
provided Firm A needs floating-rate US dollar.
The swap deal will be conducted in different stages as follows:

1st Stage:
Firm A borrows Euro at 8 % interest rate. Firm B borrows US
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dollar at LIBOR.
2nd Stage:
Principal
Euro debt market
Principal
Dollar debt market

Euro Euro
Firm A Swap Firm B
Dollar dealer Dollar

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3rd Stage:
8%
Euro debt market
LIBOR
Dollar debt market

Euro 8.40% Euro 8.60%

Firm A Swap Firm B
$ LIBOR dealer $ LIBOR

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4th Stage:
Principal
Euro debt market
Principal
Dollar debt market

Euro Euro
Firm A Swap Firm B
Dollar dealer Dollar

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 BENEFITS FROM CURRENCY SWAP
 The cost of borrowings gets reduced, which brings in gain to Firm A as well as to
Firm B

Cost to Firm A

Cost of US dollar debt in absence of swap LIBOR

Cost of US dollar debt after swap: Interest paid
minus interest received 8.00% + LIBOR – 8.40%
=LIBOR – 0.40%

Cost to Firm B

Cost of Euro debt without swap 9.2%

Cost of Euro debt after swap: Interest paid
minus interest received 8.60% + LIBOR – LIBOR 11
= 8.60%
 EQUITY SWAP
 Equity Swap involves exchange of dividend

 Two types of Equity Swaps

 Naked Equity Swap
 Capped Equity Swap

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 NAKED EQUITY SWAP

Variable Variable Dividend

Dividend
Company Shareholder Swap Dealer

Fixed Dividend

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 COVERED EQUITY SWAP

Variable Dividend Variable Dividend

Risk averse Swap Risk preferring

shareholder Fixed Dividend Dealer Fixed Dividend shareholder

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RISK BORNE BY SWAP DEALER

 Interest Rate Risk

 Credit Risk

 Exchange Rate Risk

 Sovereign Risk
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 CREDIT DEFAULT SWAP
 A credit default swap (CDS) is a swap contract in which
the protection buyer of the CDS makes a series of payments
(often referred to as the CDS "fee" or "spread") to the
protection seller and, in exchange, receives a payoff if a
credit instrument (typically a bond or loan) experiences a
credit event.

 The CDS may refer to a specified loan or bond obligation of

a “reference entity”, usually a corporation or government.

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 Reference Entity is not a party to the contract

 Settlement – Physical or Cash

 “Spread” – Expressed as a percentage of the

notional amount (1 basis point = 0.01%)

 Different from insurance

 Synthetic Long & Short position

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 Liquidate the position before the contract expires
THANK YOU
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