1. Dr Kishor Bhanushali www.ibmajor.wordpress.com
Financial Swaps
Dr Kishor Bhanushali

2. Introduction The term swap refers to exchange
Financial swaps are tools used for asset liability management
Risk management tool
Interest rate swaps and currency swaps are financial swaps which facilitates exchange of assets and liabilities
Financial swaps are asset liability management tool
Swaps are not traded in organized exchange

3. Swaps
Swaps are private agreement between two companies to exchange cash flow in the future according to a pre-arranged formula.
Most common types of swaps: interest rate swaps and currency swaps
Derivative instruments used for hedging the risk
Interest rate swaps (coupon swaps) are used for hedging interest rate risk
Currency swaps are used to hedging the exchange rate risk
Cross currency interest rate swaps

4. Interest Rate Swaps
Fixed interest rate loan exchanged for floating exchange rate loan and vice versa
Fixed-to-floating interest rate swap also called “plain vanilla coupon swap”
LIBOR : London Inter-Bank Offer Rate
MIBOR : Mumbai Inter-Bank Offer Rate
Swapping through financial intermediaries
Motivation : (a) hedging (b) desire to reduce interest rate costs

5. Currency Swaps
Used to transfer loan in one currency into loan in another currency
Liability denoted in one currency and income stream denoted in another currency
Foreign exchange risk
Borrowing and payment in from abroad
Exchanger of principle amount in one currency for the principal amount another currency between two parties at the beginning of the deal
Interest payments in the two currency would be exchanged between the parties at periodical intervals during the tenure of loan
Principle amount will be re-exchanged between two parties at the end of term
Direct negotiation or intermediaries
Used to reduce borrowing costs

6. Thanks