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Introduction To Swaps
Introduction To Swaps
Introduction To Swaps
ON TO SWAPS
VIDUSHI VERMA
17120
WHAT ARE DERIVATIVES?
• Derivatives are types of contracts whose value is derived from any underlying asset.
• An underlying asset can be anything like Stocks, Currencies, Interest rates, Indexes or
commodities.
• MIBOR (Mumbai Inter-Bank Offer Rate) • LIBOR (London Interbank Offer Rate)
is an official floating rate for Interest Rate is an globally accepted benchmark
Swaps and Foreign Rate Agreements Interest Rate
MR. A MR. B
CHARACTERISTICS OF AN INTEREST SWAP
Firm A Firm B
Interest amount at MIBOR on Rs. 1 Crore
Notional Principal
Amount For 6
Fixed Interest months
6 Month MIBOR = 8% rate
B to pay – Rs. 1 cr X (8/100) X (6/12) = Rs. 4 Lakhs
• Final Payments
A to pay- Rs. 10 lakhs
B to pay – Rs. 8.75 lakhs
CURRENCY SWAPS
• A financial contract for exchange of
principal and fixed rate of interest
payments on a loan in one currency for
another currency.
• Principal amount is also exchanged in
currency swaps along with Interest
Payments
EXAMPLE
CP1 wants to transform its $100 million USD floating rate debt into fixed rate GBP loan:
CP 1 CP 2
• $100 Million • 74 million pounds
loan loan
• USD Floating • Fixed Interest
Rate (LIBOR) Rate @ 10%
CP 1 74 million pounds CP 2
• AFTER 6 MONTHS
10% on 74 million pounds
• AT MATURITY
10% on 74 million pounds + 74 million
pounds
CP 1 LIBOR on $100 million + $100 million CP 2
INTEREST RATE CAPS
• INTEREST RATE CAP IS A LIMIT ON HOW HIGH AN INTEREST RATE CAN RISE ON
VARIABLE RATE DEBT
• A PREMIUM AMOUNT IS PAID ON BUYING INTEREST RATE CAPS
• THEY CAN BE INSTITUTED ACROSS ALL TYPES OF VARIABLE RATE PRODUCTS
• THERE ARE 2 TYPES OF INTEREST RATE INSTRUMENTS:
- INTEREST RATE CAPS
- INTEREST RATE FLOOR
CAPS
Buy
Mr. A CAP
Receive premium amount
THANK YOU