Forex Interest Rate Swaps (IRS)
An Interest rate swap is a swap in which a borrowing or lending on a fixed/ floating rate basis is swapped to that of floating/ fixed rate basis as per the requirement of the customer or the bank.
It works as follows
A customer wants to borrow say, USD 50 million for a period of 5 years on a fixed interest rate. The bank may not be willing to lend to the customer on a fixed rate but at a floating rate basis as it may be easier to raise funds on a floating rate from the market. The customer may also not want to borrow on a floating rate basis, as he would like to know what exactly would be the cost of his funds for whichever project he is seeking the funds for. Here there are conflict of interests between the borrower and the lender. However if the deal is a good one or the customer is an important one for the bank the bank may still lend to the customer on a fixed rate. For this the bank will enter into an Interest Rate Swap for the customer and lend to him on a fixed rate.
The bank will raise funds from the market say at 6 months LIBOR, which is a floating interest rate. Then the bank will enter into a Interest Rate Swap with another bank paying it fixed rate of interest and receiving floating rate of interest linked to LIBOR from them. Thus the bank hedges its own floating rate linked borrowing by receiving floating rate interest from the counter party bank and also is able to lend to the borrower on a fixed rate of interest as desired by him. The difference in the rates at which the bank lends and borrows would be its profit in the deal. The process would be reversed if the borrower wants to borrow in floating rate and the bank is willing to lend on a fixed rate basis.
Interest rate swap definition - page was last updated 16/01/2008
An Interest rate swap is a swap in which a borrowing or lending on a fixed/ floating rate basis is swapped to that of floating/ fixed rate basis as per the requirement of the customer or the bank.
It works as follows
A customer wants to borrow say, USD 50 million for a period of 5 years on a fixed interest rate. The bank may not be willing to lend to the customer on a fixed rate but at a floating rate basis as it may be easier to raise funds on a floating rate from the market. The customer may also not want to borrow on a floating rate basis, as he would like to know what exactly would be the cost of his funds for whichever project he is seeking the funds for. Here there are conflict of interests between the borrower and the lender. However if the deal is a good one or the customer is an important one for the bank the bank may still lend to the customer on a fixed rate. For this the bank will enter into an Interest Rate Swap for the customer and lend to him on a fixed rate.
The bank will raise funds from the market say at 6 months LIBOR, which is a floating interest rate. Then the bank will enter into a Interest Rate Swap with another bank paying it fixed rate of interest and receiving floating rate of interest linked to LIBOR from them. Thus the bank hedges its own floating rate linked borrowing by receiving floating rate interest from the counter party bank and also is able to lend to the borrower on a fixed rate of interest as desired by him. The difference in the rates at which the bank lends and borrows would be its profit in the deal. The process would be reversed if the borrower wants to borrow in floating rate and the bank is willing to lend on a fixed rate basis.
Interest rate swap definition - page was last updated 16/01/2008
Interest rate swap
Interest rate swap definition
An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities. They can also be used by speculators to replicate unfunded bond exposures to profit from changes in interest rates. As such, interest rate swaps are very popular and highly liquid instruments.
An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities. They can also be used by speculators to replicate unfunded bond exposures to profit from changes in interest rates. As such, interest rate swaps are very popular and highly liquid instruments.
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An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit, or manage, its exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.
Even if you get some swap points in favor, the value would be going down in the forex market
Even if you get some swap points in favor, the value would be going down in the forex market
