Structure

1 Introduction
2 Meaning of swaps
3 Features of swaps
4Types of financial swaps
5Currency swaps
6 Valuation of swaps
7 Valuation of interest rate swap
8 Valuation of a currency swap
9 Rationale behind swapping
Meaning of swaps
Swaps Swaps are private agreements between two parties
to exchange cash flows in the future.
Interest rate swaps: swapping only the interest
related cash flows between the parties in the same
currency
Currency Swaps: swapping both principal and
interest on different currency than those in the
opposite direction.
Introduction
In the recent past, there has been integration of financial markets world-
wide which have led to the emergence of some innovative financial
instruments. In a complex world of variety of financial transactions being
taken place every now and then, there arises a need to understand the risk
factors and the mechanism to avoid the risks involved in these financial
transactions. The recent trends in financial markets show increased volume
and size of swaps markets. Financial swaps are an asset liability
management technique which permits a borrower to access one market and
then exchange the liability for another type of liability. Thus, investors can
exchange one asset to another with some return and risk features in a swap
market.
Features of swaps
Counter parties
Facilitators
Cash flows
Less documentation
Transaction costs
Benefit to both parties
Default-risk
Types of financial swaps
Interest rate swaps
It is a financial agreement to exchange interest payments or
receipts for a predetermined period of time traded in the OTC
market. The swap maybe on the basis of fixed interest rate for
floating interest rate. This is the most common swap also called
plain vanilla coupon swap which is simply in agreement
between two parties in which one party payments agrees to the
other on a particular date a fixed amount of money in the future
till a specified termination date.
Interest rate calculation
Case Analysis
Currency swaps
currencies are exchanged at specific exchange rates
and at specified intervals.
The two payments streams being exchanged are
dominated in two different currencies. There is an
exchange of principal amount at the beginning and a
re-exchange at termination in a currencyswap.