Beruflich Dokumente
Kultur Dokumente
IRS- Definition
Exchange of cash flows (Risks)
Notional Principal Prescribed dates Prescribed computation method
Examples
Overnight MIBOR (Mumbai Inter-Bank Offer Rate) Commercial Paper Rates Prime Lending Rates T-Bill Yields (14 , 91, 182 and 365 days ) Forex Swap Rates (Premia)
Corporate
FLOATING CASH FLOW- Cfloat
Citibank
OIS - Mechanics
Fixed Coupon is calculated as follows Cfix = P x Rfix x
Cfix P Rfix d basis = = = = =
d basis
Fixed Coupon Notional Principal Agreed Fixed Interest Rate Length of Coupon Period in days Applicable day basis (e.g. 365)
OIS - Mechanics
Floating Coupon is calculated as follows -
OIS - Mechanics
Floating Rate is calculated as follows Rfloat = ( [ 1 + ri x d i ] - 1 ) basis i=1 basis d total
d business
= = = = = =
Floating Rate MIBOR Rate for the ith business day Number of days the ith MIBOR rate applies Number of business days in the coupon period Total no. of calendar days in the coupon period Applicable day basis (e.g. 365)
IRS- Benefits
Essentially divorces liquidity management from interest rate risk management. Simple to use Minimal credit risk No ballooning of balance sheet
IRS- Opportunities
Better interest rate risk management
Diversification of risk Implement interest rate views
IRS- Structures
Hedge increases- go fixed
Hardening rates: Fix future CP issue/ rollover costs Convert floating WCDL into fixed rate
10.00%
MIBOR
9.5%
MIBOR
IRS- Issues
Illiquidity in the secondary corporate bonds T Bill reference rate yet to evolve despite existence of a T Bill auction calendar Expected time for development of a term money market
Continuing discontinuities
High bid-offer spreads in IRS
Lack of efficiency Fewer aggressive banks/ Docs/ Credit issues Logistical/ internal limitations
Continuing discontinuities
TBIlls vs Fwds
FCNR USD funds with few banks surplus INR other banks Switching difficult from both sides Difficult to short GOI securities- 1way 15% rule for longer tenors Short end is relatively integrated
RBI approach
Openness - e.g. Feedback on Policy IRS- hedging mechanism Public statements on objectives Corridor of interest rates.
A-97
A-98
O-96
O-97
O-98
A-99
J-96
J-97
J-97
J-98
J-98
J-99
Government
FY99-00 Govt. net borrowing target (78% done) Long tenor based rally - high duration Oct. Credit policy, higher fiscal needs- Kashmir
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