SWAPS AND EMERGING DERIVATIVES

Dr Deepika Upadhyay
 SWAPS
• Swap refers to an exchange of one financial instrument for another
between the parties concerned. This exchange takes place at a
predetermined time, as specified in the contract.

• Swaps are not exchange oriented and are traded over the counter,
usually the dealing are oriented through banks. Swaps can be used
to hedge risk of various kinds which includes interest rate risk and
currency risk. Currency swaps and interest rates swaps are the two
most common kinds of swaps traded in the market.

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HISTORY OF
SWAPS IN INDIA
•Swap agreements originated from agreements created in Great Britain in
the 1970s to circumvent foreign exchange controls adopted by the British
government.

•The British government had a policy of taxing foreign exchange

transactions that involved the British pound, which made it more difficult
for capital to leave the country.

•IBM and the World Bank entered into the first formalized swap agreement
in 1981, when the World Bank needed to borrow German marks and Swiss
francs to finance its operations, but the governments of those countries
prohibited it from borrowing.

•During the 2008 financial crisis when credit default swaps on mortgage-
backed securities (MBS) were cited as one of the primary contributing
factors to the economic downturn.

•Swaps were historically traded over the counter (OTC), but they are now
mostly traded on centralized exchanges.

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TYPES OF
SWAPS

Currency Swaps

Interest Rate Swaps

Commodity Swaps

Credit Default Swaps

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MECHANICS OF
INTEREST RATE
SWAPS

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MARKET GAP Few, if any, products on the market help customers like we do

CUSTOMERS 66% of US consumers spend money on multiple products that

only partially resolves their issue

FINANCIALS Millennials account for about a quarter of the $48 billion spent on
other products in 2018

COSTS Loss of productivity costing consumers thousands of dollars

PROBLEM
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 SOLUTION

CLOSE THE GAP TARGET AUDIENCE

Our product makes consumer lives easier, and no Our target audience is Gen Z (18-25 years old)
other product on the market offers the same features

COST SAVINGS EASY TO USE

Reduce expenses for replacement products Simple design that gives customers the targeted
information they need

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 Economical
Swap is generally cheaper. There is no upfront premium and it
reduces transactions costs.

Hedge
Swap can be used to hedge risk, and long time period hedge is
possible.

Flexible
It provides flexibility and maintains informational advantages.

ADVANTAGES Longevity
OF SWAPS It has longer term than futures or options. Swaps will run for
years, whereas forwards and futures are for the relatively short
term.

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 Additional cost in case of termination
Early termination of swap before maturity may incur a breakage cost.

Lack of Liquidity
Since it is a customized trade it suffers from lack of liquidity

Default risk
It also has default risk

DISADVANTAGE Complexity
S Not easy to understand

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 EMERGING DERIVATIVE
PRODUCTS
Currency Derivatives
Credit Linked Notes
Credit Default Swaps
Structured Finance Products
Securitization
CDO, Synthetic CDOs
ABS
Weather derivatives
Bitcoin futures, diamond derivatives
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 The price of the currency
CURRENCY DERIVATIVES Buy a call option
pair is expected to rise
The price of the currency
Buy a put option
pair is expected to fall
Currency derivatives are financial contracts (futures, options The price of the currency
and swaps) which have no value of their own. They derive Sell a call option
their value from the value of the underlying asset, in this case, pair is expected to fall
currencies. For example, assume that the current USD/INR The price of the currency
rate is 73.2450. A 1 month USD/INR futures contract is Sell a put option
pair is expected to rise
trading at Rs 73.3650.

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 CREDIT LINKED NOTES

•A credit-linked note (CLN) is a financial instrument

that allows the issuer to transfer specific credit risks
to credit investors.
•A credit default swap is a financial derivative or
contract that allows issuers of credit-linked notes to
shift or "swap" their credit risk to another investor.

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 CDO

•A collateralized debt obligation is a

complex structured finance product that is
backed by a pool of loans and other assets.
•These underlying assets serve as collateral
if the loan goes into default.
•The tranches of CDOs indicate the level of
risk in the underlying loans, with senior
tranches having the lowest risk .
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 ASSET BACKED
SECURITIES

•Asset-backed securities (ABS) are securities

derived from a pool of underlying assets.
•Asset-backed securities are characterized by a
diversified risk profile, as each security only
contains a fraction of the total pool of
underlying assets.
•When purchasing an asset-backed security, the
investor receives all interest and principal
payments but also takes on the risk of the
underlying assets.

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 WEATHER DERIVATIVES

Weather derivatives are financial instruments that

can be used by organizations or individuals as
part of a risk management strategy to reduce risk
associated with adverse or unexpected weather
conditions. Weather derivatives are derivative
securities in which an investor hedges against the
future state of the weather.

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 NEW INSTRUMENTS

INFLATION
INDEXED DIAMOND
BITCOIN FUTURES DERIVATIVES DERIVATIVES

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THANK YOU

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