SWAP

SWAP - is a derivative contract where one party exchanges or "swaps" the cash flows or value of one
asset for another. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while
the other is variable.
*Since Swap occur on the over the counter market there is always the risk of a counter party defaulting on
the swap*.

The objective of a swap is to change one scheme of payments into another one of a different nature,
which is more suitable to the needs or objectives of the parties, who could be retail clients, investors, or
large companies.

SWAP MARKET – a financial market in which organizations exchange loan agreements, etc. for
ones that have a different interest rate, currency etc. that suits them better.
SWAP CONTRACT – financial derivatives that allow two transacting agents to “swap” revenue streams
arising from some underlying assets held by each party.
TYPES OF SWAP CONTRACTS

INTEREST RATE SWAPS - allow their holders to swap financial flows associated with two
separate debt instruments. Interest rate swaps are most commonly used by businesses that either
generate revenues linked to a variable interest rate debt instrument and incur costs linked to a
fixed interest rate debt instrument or generate revenues linked to a fixed interest rate debt
instrument and incur costs linked to a variable interest rate debt instrument.
CURRENCY SWAPS - is an agreement in which two parties exchange the principal amount of a
loan and the interest in one currency for the principal and interest in another currency. Currency
swaps are used to obtain foreign currency loans at a better interest rate than a company could
obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on
foreign currency loans which it has already taken out.
COMMODITY SWAPS - is a type of swap agreement whereby a floating market price based on
an underlying commodity is traded for a fixed price over a specified period. Commodity swaps
are common among individuals or companies that use raw materials to produce goods or finished
products. Profit from a finished product may suffer if commodity prices vary, as output prices
may not change in sync with commodity prices. A commodity swap allows receipt of payment
linked to the commodity price against a fixed rate.
CREDIT DEFAULT SWAP - is a financial derivative or contract that allows an investor to
"swap" or offset his or her credit risk with that of another investor. For example, if a lender is
worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap
that risk. To swap the risk of default, the lender buys a CDS from another investor who agrees to
reimburse the lender in the case the borrower defaults. Most CDS will require an
ongoing premium payment to maintain the contract, which is like an insurance policy.
EQUITY SWAP - is an exchange of future cash flows between two parties that allows each
party to diversify its income for a specified period of time while still holding its original assets.

ADVANTAGES OF SWAP

Swap is generally cheaper. There is no upfront premium and it reduces transactions

costs.
 Swap can be used to hedge risk
It provides flexible and maintains informational advantages.
It has no longer term than future or options.
Swap will run for years, whereas forwards and futures are for the relatively short term.

DISADVANTAGES OF SWAP
Early termination of swap before maturity may incur a breakage cost.
Lack of liquidity.
It is subject to default risk.

SUBMITTED TO:MA. ELEANOR FERNADEZ

ACOSTA, RUTH P.

CALUCAG, PAUL

DOCA, VIOLY

DOMINGO, KRYZLLAIN ANNE

GARINGAN, JEWEL LEE

LASAM, JUANICKO

MARAYAG, DONNABEL S.

PADUA, NORVELYN

PANGANIBAN, ARA KYNNA

TAGACAY, ANGELICA

TURARAY, MA. VERONICA C.