Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
International Finance
According to Investopedia, interest rate swaps are OTC-traded contracts between two parties, whereby the two parties agree to exchange the future interest payments related on a principal amount
This exchange usually implies that the parties exchange a fixed payment for a floating payment, in other words, a fixed interest rate for a floating interest rate. While this is the most current form of interest rate swap, all the other combinations of fixed vs. floating (floating for floating and fixed for fixed, as well as floating for floating with different currencies) are also present in such exchanges.
As mentioned, one of the most common forms of interest swaps is the fixed-for-floating rate swap. In this situation, one of the parties pays its fixed interest rate to the other party. In exchange, the first party receives the floating rate, which is usually an interest calculated around a reference rate, such as LIBOR or EURIBOR (of the type LIBOR + 1%, for example). The former is called the payer, while the latter is called the receiver.
As a consequence of this interest rate swap, the payer can now borrow on the market at a floating rate, namely the reference rate plus percentage (instead of the fixed rate it initially had). The receiver can now borrow on the market at the fixed rate, instead of the floating rate.
Primarily, interest rate swaps are used either for speculative or hedging motivations. Those who exchange the floating rate for a fixed rate believe that the reference rate will rise to the degree to which a fixed rate is preferred and provides a lower cost than a floating rate. Those who prefer a floating rate believe the reference rate will fall, making their operation cheaper from an interest perspective (the floating rate will thus be lower than the fixed rate). There are also arbitrage opportunities that offer interesting gain opportunities for the parties involved.
Bibliography
1. Interest Rate Swap definition. On the Internet at http://www.investopedia.com/terms/i/interestrateswap.asp. Last retrieved on October 13, 2014
Interest Rate Swap definition. On the Internet at http://www.investopedia.com/terms/i/interestrateswap.asp. Last retrieved on October 13, 2014
Risk Management in Hedge Funds A research of how dissimilar hedge fund managers identify and achieve risk The most vital lesson in expressions of Hedge Fund Management comes from the inadequate name of this kind of alternative investment that is an alternative: The notion that all methodical risks are differentiated away is not really applicable here, with the Hedge Fund returns, in realism, representing a mixture of superior administration of market
Risk Management [1] If you believe a stock will appreciate and want to risk little to speculate that the stock will rise what are your option? Holding a call option is fairly low risk because it would allow me to buy future stocks at a current price. An increase in stock value would limit my losses and allow me to profit by means of leveraged speculation. As a holder exercising a call
In 2004, FASB (Financial Accounting Standards Board) issued a draft meant to provide guidelines of how entities should estimate fair value prices for reporting purposes. Escape clause - is a part in any contract that specifies the conditions in which one or more parties involved in the contract may avoid performing its duties as specified in the contract. 14. The import substitution is a policy through which countries decide to substitute
Long-Term Capital Management: The Original Enron? Three years before energy industry giant Enron Corp. sought protection from creditors and came under the harsh light of scrutiny for the complex web of off-balance sheet deals that masked the firm's huge debt, a very similar scenario unraveled among some of Wall Street's most celebrated financial players. But while Enron unsuccessfully sought eleventh-hour aid from the power brokers it has bankrolled in Washington D.C.,
Risk Management Financial derivatives are an innovation in the field of finance that enable us to understand, measure and manage our financial risks. The definition of financial derivative according to the textbooks is of a financial instrument, and the value of any financial derivative is based on the value or values of the underlying securities or groups of securities that constitute the derivative. It can be said that there have been
. This measure led to the creation of the country's financial power and allowed the peasantry to work in the urban sectors. Therefore, the productivity growth, the great behavior of the workforce, the low salaries, the good education, and maybe most important of all, the hard work and social peace have lead to the occurrence of another Asian Tiger. "In the 80's, Taiwan had become an economic power with a mature