IRS Introduction

eClerx Training Collateral
Interest Rate Swaps
eClerx An ISO / IEC 27001:2005 Certified Company

Confidential eClerx An ISO / IEC 27001:2005 Certified Company
Product Knowledge

Swaps Swaptions / Cancelable Cap / Floor / Cross Currency Collar / Corridors
2 Confidential Confidential-For Internal Use only eClerx An ISO / IEC 27001:2005 Certified Company Internal Confidential April 2008
Interest Rate Swaps

An interest rate swap is an agreement entered into between two counterparties under which cash flows of a fixed rate leg are exchanged for those of a floating rate leg without actual exchange of the notional. A fixed rate leg is one where the interest rate is known in advance. e.g. 8% on a notional of 100,000 USD A floating rate leg is one whose value is obtained by resetting against an agreed reference rate. E.g. LIBOR The principal amount is notional because there is no need to exchange actual amounts of principal The most popular version is the `plain vanilla swap', also known as a `generic swap
Interest Rate Swaps

Lets motivate this discussion with a relatively simple example: XYZ corporate has $200 million of floating rate debt at LIBOR. This means that they at the beginning of the year they reset the interest rate on the loan to LIBOR, and pay that rate for the rest of the year. They would prefer to have a fixed rate. Here is what the current situation is:
Pays LIBOR
XYZ Corp
How could XYZ switch to a fixed rate loan? They could retire the current loan and issue a fixed-rate loan. They could enter into an interest rate swap.
Interest Rate Swaps

What they could do would be to enter into a swap agreement in which they agreed to pay a fixed rate of interest (say 6.9548%) on a notional amount, and then to receive the LIBOR rate on that amount as well. This can be illustrated as:
Pays LIBOR
Receives LIBOR XYZ Corp Pays 6.9548% Swap Dealer
The net effect is, of course, that XYZ corporation is now paying a fixed rate of 6.9548% on $200 million. We can see that XYZ corporation has an incentive to enter into this contract, they are able to convert a floating rate commitment into a fixed rate one, but why would the dealer enter into this arrangement? One potential reason is that the dealer has a fixed rate commitment that they would like to convert into a floating rate instrument. More likely, however, they are doing this simply to earn a fee. They can enter into a nearly-offsetting agreement with a second counterparty.
Interest Rate Swaps

Let us assume that there is now a second corporation, ABC Corp, that is currently paying 7.00% on a fixed rate bond, and they wish to convert that into a floating rate instrument.
Pays LIBOR
Receives LIBOR XYZ Corp Pays 6.9548% Swap Dealer ABC Corp
Pays 7.00%
If the swap dealer agreed to a second swap with ABC, one where ABC paid LIBOR to the dealer and received 6.85% fixed, the net effect is that the dealer earns 0.1048% on the notional.
Pays LIBOR Receives LIBOR XYZ Corp Pays 6.9548% Swap Dealer Pays LIBOR Gets 6.85%
ABC Corp
Pays 7.00%
Comparative Advantage
Lets say that there are two companies, AAA and BBB, who can borrow in either the fixed or floating rate markets at the following rates: Company AAA BBB Fixed 10.0% 11.2% Floating 6-Month LIBOR + 0.3% 6-Month LIBOR + 1.0%
Clearly AAA has an absolute advantage in both markets, but since BBB pays only 0.7% more in the floating markets (as opposed to the 1.2% more they pay in the fixed markets), they have a comparative advantage in the floating market. In this case we can structure a swap transaction that will be beneficial to both AAA and BBB (and the dealer!). First, both AAA and BBB issue debt in the markets in which they both have comparative advantages (say $100m).
10.0%
AAA Corp
Swap Dealer
BBB Corp
LIBOR+1.0%
In this case we can structure a swap transaction that will be beneficial to both AAA and BBB (and the dealer!). Next, they enter into swaps with the dealer. AAA agrees to pay LIBOR and receive 9.90% fixed. Their net position is that they now pay LIBOR + 0.10%, which is better than the LIBOR +0.3% they would pay in the floating rate market!
10.0%
9.90% AAA Corp LIBOR Swap Dealer BBB Corp
LIBOR+1.0%
AAA Net: Pays LIBOR+0.10% Net Gain: .20%
In this case we can structure a swap transaction that will be beneficial to both AAA and BBB (and the dealer!). Then BBB enters into a swap where they receive LIBOR and pay a fixed rate of 10%. Their net is to pay fixed 11%, which is better than the 11.2% they could get by issuing debt in the fixed market.
10.0% AAA Corp 9.90% LIBOR Swap Dealer 10% BBB Corp LIBOR+1.0%
LIBOR
AAA Net: Pays LIBOR+0.10% Net Gain: .20%
ABC Net: Pays 11% Net gain: 0.2%
Other Types of Swaps

basis swap is a swap between two different kinds of floating rate debt in the same currency e.g., between 6 month LIBOR and 3 month LIBOR or between 6 month LIBOR and US prime rate. zero coupon swap is a swap between floating rate and single payment of fixed interest at maturity. (A zero coupon bond pays no interest but gives the holder an increase in value at maturity; with a zero coupon swap, the single payment of fixed interest represents this increase in value). amortizing swap is one where the notional principal decreases over its life. These swaps designed for use with loans where the principal increases or decreases in the same way.
Uses of IRS
To obtain lower cost funding To hedge interest rate exposure To take speculative positions in relation to future movements in interest rates. Swapping allows issuers to revise their debt profile to take advantage of current or expected future market conditions.
What is a Swaption
The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right, but not the obligation, to enter into a specified swap agreement with the issuer on a specified future date. The agreement will specify whether the buyer of the swaption will be a fixed-rate receiver. Types Of Swaptions: European Swaption: It gives the Buyer the right to exercise only on the maturity date of option. American Swaption: It gives the Buyer the right to exercise at any time during the option period. Bermudan Swaption: It gives the buyer the right to exercise on specific dates during the option period.
What is a Swaption Straddle?

Swaption Straddle is just a variation of Swaption. But the difference being is that here the Fixed / Floating rate payers are not fixed. The holder of the option can determine whether he wants to be a Fixed or a Floating rate payer. Depending on the profitability of position & general outlook of interest rates, the holder takes his bets. Holder has the right but not the obligation to exercise the option.
What are Cancelables?

Cancelables are options which enable a party to terminate a swap before its actual termination date. Cancelables are of 2 types: Callable swap & Putable swap. A. An Interest rate swap where the fixed rate payer has the right but not the obligation to terminate the swap at one or more pre-determined times during the life of the swap is called an Callable swap B. A Swap where the Floating rate payer has the right to terminate is known as Putable swap.
Cancelables v/s Swaptions

Swaptions are the optional right to enter into an swap but cancelables are the optional right to exit out of an Swap. Swaptions can have cash settlement / physical but Cancelables do not have Cash Settlement. In Swaptions the Party having the right of Swaption have to pay to the seller of the Swaption a Premium but in Cancelable the Party having the right to exit have to pay to another Party an Additional Amt.
CAP
An interest rate cap is a way of placing a maximum value on a customers floating rate index (e.g. Prime, LIBOR, C.P., PSA). For an up-front fee (premium), the customer selects the term of the cap, and the maximum value of the index. The maximum value of the index is called the strike rate. How it Works: The buyer and seller of the cap agree on the term (tenor), the strike rate, notional amount (size), amortization , starting date and frequency of settlement. If the applicable index resets above the strike rate, then the National City pays the customer the difference between the index and the strike rate times the days basis of the reset period times the optional amount outstanding.
Floor
An interest rate floor is used to set a minimum value on a customers floating rate index (e.g. Prime, LIBOR, C.P., PSA). For an up-front fee (premium), the buyer of the floor selects the term of the floor, and the minimum value of the index. The minimum index value is called the strike rate. How it Works: The buyer and seller agree upon the term (tenor), the strike rate, the notional amount (size), the amortization of the floor (bullet, mortgage, straight line, etc.), the start date, and the frequency of settlement. If the applicable index resets beneath the strike rate, then National City pays the customer the difference between the strike rate and the index times the notional amount outstanding times the days basis for the settlement period.
COLLAR
Combining a cap and a floor into one product creates a Collar. In this strategy Cap is bought is at higher rate and a Floor is sold at lower rate to reduce the premium for the Cap. Hence your floating rate obligations are taken care of once the cap rate is breached and you pay the difference of floor and current rate if floor rate is breached. Similar to Caps and Floors the customer selects the index (Prime, LIBOR, C.P., PSA), the length of time, and strike rates for both the cap and the floor. The buyer and the seller agree upon the term (tenor), the cap and floor strike rates, the notional amount, the start date, and the settlement frequency. If at any time during the tenor of the collar, the index moves above the cap strike rate or below the floor strike rate, one party will owe the other a payment.
Product Portfolio
13% 2% 1% 14%
64%
6%
European Trades Bermudan Trades
C ap/Floors Swaption Straddle
American Trades Vanilla Swaps

IRS Introduction

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

IRS Introduction

Hochgeladen von

Copyright:

Verfügbare Formate

eClerx Training Collateral

Interest Rate Swaps

eClerx An ISO / IEC 27001:2005 Certified Company

Swaps Swaptions / Cancelable Cap / Floor / Cross Currency Collar / Corridors

Interest Rate Swaps

Interest Rate Swaps

Interest Rate Swaps

Receives LIBOR XYZ Corp Pays 6.9548% Swap Dealer

Interest Rate Swaps

9.90% AAA Corp LIBOR Swap Dealer BBB Corp

AAA Net: Pays LIBOR+0.10% Net Gain: .20%

AAA Net: Pays LIBOR+0.10% Net Gain: .20%

ABC Net: Pays 11% Net gain: 0.2%

Other Types of Swaps

What is a Swaption Straddle?

What are Cancelables?

Cancelables v/s Swaptions

European Trades Bermudan Trades

C ap/Floors Swaption Straddle

American Trades Vanilla Swaps

Das könnte Ihnen auch gefallen