TheSwapBankA swap bank is a generic term to describe afinancial institution that facilitates swapsbetween counterparties.The swap bank can serve as either a broker or adealer. As a broker, the swap bank matches counterpartiesbut does not assume any of the risks of the swap As a dealer, the swap bank stands ready to accepteither side of a currency swap, and then later lay offtheir risk, or match it with a counterparty
The Swap Bank ❖A swap bank is a generic term to describe a financial institution that facilitates swaps between counterparties. ❖The swap bank can serve as either a broker or a dealer. ▪ As a broker, the swap bank matches counterparties but does not assume any of the risks of the swap. ▪ As a dealer, the swap bank stands ready to accept either side of a currency swap, and then later lay off their risk, or match it with a counterparty
Swap Market QuotationsSwap banks will tailor the terms ofinterest rate and currency swaps tocustomers' needsThey also make a market in “plainvanilla" swaps and provide quotes forthese. Since the swap banks are dealers forthese swaps, there is a bid-ask spread
Swap Market Quotations ❖Swap banks will tailor the terms of interest rate and currency swaps to customers’ needs. ❖They also make a market in “plain vanilla” swaps and provide quotes for these. Since the swap banks are dealers for these swaps, there is a bid-ask spread
Interest Rate Swap QuotationsThe convention is to quote against U.S. dollar LIBORU.S. $Euro-Ef SterlingSwiss francBidAskBidBidAskBidAskAsk5.215.220.922.342.370.983.543.571 year5.181.231.313.903.942.622.655.142 year2.862.893 year3.82-3.85 means the swap bank will3.064 year3.09pay fixed-rate euro payments at 3.82%3.235 year3.26against receiving euro LIBOR or it will3.383.41receive fixed-rate euro payments at6 year3.85% against receiving euro LIBOR3.523.557 year3.663.635.105.152.372.454.624.668 year3.743.775.095.144.482.564.704.729 year3.823.855.085.132.562.644.754.7910 year
Interest Rate Swap Quotations Euro-€ £ Sterling Swiss franc U.S. $ Bid Ask Bid Ask Bid Ask Bid Ask 1 year 2.34 2.37 5.21 5.22 0.92 0.98 3.54 3.57 2 year 2.62 2.65 5.14 5.18 1.23 1.31 3.90 3.94 3 year 2.86 2.89 5.13 5.17 1.50 1.58 4.11 4.13 4 year 3.06 3.09 5.12 5.17 1.73 1.81 4.25 4.28 5 year 3.23 3.26 5.11 5.16 1.93 2.01 4.37 4.39 6 year 3.38 3.41 5.11 5.16 2.10 2.18 4.46 4.50 7 year 3.52 3.55 5.10 5.15 2.25 2.33 4.55 4.58 8 year 3.63 3.66 5.10 5.15 2.37 2.45 4.62 4.66 9 year 3.74 3.77 5.09 5.14 4.48 2.56 4.70 4.72 10 year 3.82 3.85 5.08 5.13 2.56 2.64 4.75 4.79 3.82–3.85 means the swap bank will pay fixed-rate euro payments at 3.82% against receiving euro LIBOR or it will receive fixed-rate euro payments at 3.85% against receiving euro LIBOR. The convention is to quote against U.S. dollar LIBOR
SwapQuotations3.82-3.85 means the swap bank will pay fixed-rateeuro payments at 3.82% against receiving dollarLIBOR or it will receive fixed-rate euro payments at3.85% against paying dollar LIBOR.FirmSwap3.85%3.82%FirmBABank$LIBOR$LIBORWhile most swaps are quoted against "flat" dollarLIBOR, "off-market" swaps are available where oneparty pays LIBOR plus or minus some number
Swap Quotations 3.82–3.85 means the swap bank will pay fixed-rate euro payments at 3.82% against receiving dollar LIBOR or it will receive fixed-rate euro payments at 3.85% against paying dollar LIBOR. Swap Bank Firm A Firm B €3.85% €3.82% $LIBOR $LIBOR While most swaps are quoted against “flat” dollar LIBOR, “off-market” swaps are available where one party pays LIBOR plus or minus some number
AnExample of an Interest RateSwap*Consider this example of a “plain vanilla"interest rate swapBank A is a AAA-rated international banklocated in the U.K. who wishes to raise$10,000,000 to finance floating-rate Eurodollarloans.Bank A is considering issuing 5-year fixed-rateEurodollar bonds at iO percent. It would make more sense for the bank to issuefloating-rate notes at LIBOR to finance floating-rateEurodollar loans
An Example of an Interest Rate Swap ❖Consider this example of a “plain vanilla” interest rate swap. ❖Bank A is a AAA-rated international bank located in the U.K. who wishes to raise $10,000,000 to finance floating-rate Eurodollar loans. ▪ Bank A is considering issuing 5-year fixed-rate Eurodollar bonds at 10 percent. ▪ It would make more sense for the bank to issue floating-rate notes at LIBOR to finance floating-rate Eurodollar loans