Swaps - 10-1 Chapter Nine Types of Swaps Interest Rate...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 10-1 Chapter Nine Types of Swaps Interest Rate Swaps Currency Swaps Variations of Currency and Interest Rate Swaps Risks of Interest Rate and Currency Swaps Concluding Points About Swaps 10-2 Definitions In a swap, two counterparties agree to exchange or swap cash flows at periodic intervals. There are two types of swaps: Interest rate swap an exchange of fixed-rate interest payments for floating-rate interest payments. Currency swap an exchange of interest payments in one currency for interest payments in another currency. 10-3 An Example of an Interest Rate Swap Washington Mutual has a huge portfolio of fixed-rate mortgages (averaging 13.25%) financed by deposits earning a floating-rate of interest (currently paying LIBOR + 1%). Income fixed. Obligations floating. What is WAMU afraid of? 10-4 An Example of an Interest Rate Swap Westcoast Finance provides short-term loans to companies throughout the West (currently charging LIBOR + .75%) and is financed by a 30-year fixed-rate bond issue made 4 years ago (paying 11%). Income floating. Obligations fixed. What is Westcoast afraid of? 10-5 LIBOR 11.75% An Example of an Interest Rate Swap WAMU Swap Bank The swap bank makes this offer to WAMU: You pay 11.75 % per year on $10 million notional value for 5 years and we will pay you LIBOR on $10 million for 5 years 10-6 LIBOR 11.75% An Example of an Interest Rate Swap WAMU Swap Bank They borrow LIBOR + 1% floating and have a net borrowing position of: 13.25% + LIBOR (11.75% + LIBOR + 1%) = 13....
View Full Document

This note was uploaded on 04/13/2010 for the course FINANCE PGP0810 taught by Professor Rc during the Summer '10 term at Symbiosis International University.

Page1 / 22

Swaps - 10-1 Chapter Nine Types of Swaps Interest Rate...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online