Chapter_10 - Chapter Outline Types of Swaps Size of the Swap Market The Swap Bank Interest Rate Swaps Currency Swaps Chapter Outline(continued Swap

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Chapter Outline Types of Swaps Size of the Swap Market The Swap Bank Interest Rate Swaps Currency Swaps
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Chapter Outline (continued) Swap Market Quotations Variations of Basic Currency and Interest Rate Swaps Risks of Interest Rate and Currency Swaps Swap Market Efficiency Concluding Points About Swaps
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Definitions In a swap, two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals. There are two types of interest rate swaps: Single currency interest rate swap “Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps . Cross-Currency interest rate swap This is often called a currency swap ; fixed for fixed rate debt service in two (or more) currencies.
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Size of the Swap Market In 2001 the notational principal of: Interest rate swaps was $58,897,000,000. Currency swaps was $3,942,000,000 The most popular currencies are: U.S. dollar Japanese yen Euro Swiss franc British pound sterling
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The Swap Bank A swap bank is a generic term to describe a financial institution that facilitates swaps between counterparties. The swap bank can serve as either a broker or a dealer. As a broker, the swap bank matches counterparties but does not assume any of the risks of the swap. As a dealer, the swap bank stands ready to accept either side of a currency swap, and then later lay off their risk, or match it with a
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An Example of an Interest Rate Swap Consider this example of a “plain vanilla” interest rate swap. Bank A is a AAA-rated international bank located in the U.K. and wishes to raise $10,000,000 to finance floating- rate Eurodollar loans. Bank A is considering issuing 5-year fixed-rate Eurodollar bonds at 10 percent. It would make more sense to for the bank to issue floating-rate notes at LIBOR to finance floating-rate Eurodollar loans.
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Rate Swap Firm B is a BBB-rated U.S. company. It needs $10,000,000 to finance an investment with a five- year economic life. Firm B is considering issuing 5-year fixed- rate Eurodollar bonds at 11.75 percent. Alternatively, firm B can raise the money by issuing 5-year floating-rate notes at LIBOR + ½ percent. Firm B would prefer to borrow at a fixed
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This note was uploaded on 07/16/2011 for the course FINA 5331 taught by Professor Staff during the Spring '08 term at UT Arlington.

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Chapter_10 - Chapter Outline Types of Swaps Size of the Swap Market The Swap Bank Interest Rate Swaps Currency Swaps Chapter Outline(continued Swap

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