FIN4520-Chapter7

FIN4520-Chapter7 - Swaps Chapter 7 1 Nature of Swaps A swap...

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Unformatted text preview: Swaps Chapter 7 1 Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules. Interest rate swap -Two parties agree to swap interest rate payments on a notional principal denominated in the same currency. principal not usually exchanged Currency swap - Two parties agree to exchange currencies at recurrent intervals. principal exchanged at beginning and end 2 Growth in Swaps Early 1970s exchange rates grew volatile due to collapse of Bretton Woods Agreement (signed in 1944). US$ was convertible to gold at fixed rate and all other currencies convertible to US$. In 1971 Nixon cut tie of US$ to gold because US$ was overvalued. Volatility created the perfect environment for multinational corporations to hedge using swaps. 3 An Example of a Plain Vanilla Interest Rate Swap An agreement by Microsoft to receive 6-month LIBOR & pay a fixed rate of 5% per annum every 6 months for 3 years on a notional principal of $100 million Next slide illustrates cash flows 4---------Millions of Dollars---------...
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This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.

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FIN4520-Chapter7 - Swaps Chapter 7 1 Nature of Swaps A swap...

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