Chapter Ten Currency Interest Rate Swaps 10 Chapter objective This chapter discusses currency and interest rate swaps, which are relatively new instruments for hedging long-term interest rate risk and foreign exchange risk
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 10 Chapter Ten Currency & Interest Rate Swaps Chapter Objective: This chapter discusses currency and interest rate swaps, which are relatively new instruments for hedging long-term interest rate risk and foreign exchange risk
Chapter Outline Types of Swaps ●SlZe of the Swap Market The swap bank ● Interest Rate Swaps ● Currency swaps McGraw-Hilylrwoin 10-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-1 Chapter Outline ⚫ Types of Swaps ⚫ Size of the Swap Market ⚫ The Swap Bank ⚫ Interest Rate Swaps ⚫ Currency Swaps
Chapter Outline(continued) Swap Market Quotations o Variations of Basic Currency and Interest rate Swaps o Risks of Interest rate and currency Swaps Swap Market Efficiency o Concluding points about swaps McGraw-Hilylrwoin 10-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-2 Chapter Outline (continued) ⚫ Swap Market Quotations ⚫ Variations of Basic Currency and Interest Rate Swaps ⚫ Risks of Interest Rate and Currency Swaps ⚫ Swap Market Efficiency ⚫ Concluding Points About Swaps
Definitions In a swap two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals There are two types of interest rate swaps Single currency interest rate swap Plain vanilla fixed-for-floating swaps are often just called Interest rate swaps Cross-Currency interest rate swap This is often called a currency swap fixed for fixed rate debt service in two(or more)currencies McGraw-Hilylrwoin 10-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-3 Definitions ⚫ In a swap, two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals. ⚫ There are two types of interest rate swaps: ◼ Single currency interest rate swap ◆“Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps. ◼ Cross-Currency interest rate swap ◆This is often called a currency swap; fixed for fixed rate debt service in two (or more) currencies
Size of the Swap Market o In 1995 the notational principal of interest rate swaps was $12, 810, 736.000,000 Currency swaps $1, 197, 395,000,000 The most popular currencies are U.Ss(34%) ￥(23%) DM(11% FF(10%) ￡(6%) McGraw-Hilylrwoin 10-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-4 Size of the Swap Market ⚫ In 1995 the notational principal of: interest rate swaps was $12,810,736,000,000. Currency swaps $1,197,395,000,000 ⚫ The most popular currencies are: ◼ U.S.$ (34%) ◼ ¥ (23%) ◼ DM (11%) ◼ FF (10%) ◼ £ (6%)