7-Interest Rrate and Currency Swaps

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1、INTERESTRATEANDCURRENCYSWAPSChapterObjectiveThischapterdiscussescurrencyandinterestrateswaps,whicharerelativelynewinstrumentsforhedginglong-terminterestrateriskandforeignexchangerisk.ChapterOutlineTypesofSwapsSwapMarketstructure：counterparties，swapbanksandterminolog

2、iesInterestRateSwapsCurrencySwapsWhatisaswap?anexchangeofcashflowsTypesofSwapsSinglecurrencyinterestrateswap“Plainvanilla”,interestrateswapsfixed-for-floatingswapsCross-Currencyinterestrateswapcurrencyswapfixedforfixedrate/floatingforfloatingdebtserviceintwo(o

3、rmore)currencies“plainvanilla”InterestRateSwapBankAisaAAA-ratedinternationalbanklocatedintheU.K.andwishestoraise$10,000,000tofinancefloating-rateEurodollarloans.FirmBisaBBB-ratedU.S.company.Itneeds$10,000,000tofinanceaninvestmentwithafive-yeareconomiclife.Theborrowi

4、ngopportunitiesofthetwofirmsare:COMPANYBBANKAFixedrate11.75%10%FloatingrateLIBOR+.5%LIBORTheswapbankmakes¼%SwapBank103/8%10½%LIBOR–1/8%LIBOR–¼%BankCompanyABAsaves½%Bsaves½%COMPANYBBANKAFixedrate11.75%10%FloatingrateLIBOR+.5%LIBORCurrencySwapanexchangeofaliabilityinonec

5、urrencyforaliabilityinanothercurrency.UScorporationwantstofinanceforitsplantsinUKcomparativelyadvancedindollarloans,butprefersaloaninpoundsUKcorporationwantstofinanceforitsplantsinUScomparativelyadvantagein$£poundloans,butprefersaloandollarCompanyA8.0%11.6%CompanyB

6、10.0%12.0%SpotexchangerateisS($/£)=$1.60/£,0theU.S.firm'sfinancingneedsis£10,000,000.SwapBank$8%$9.4%£11%£12%$8%FirmFirm£12%AB$£CompanyA8.0%11.6%CompanyB10.0%12.0%Whataretheimplicationsofthisexample？•Howisswapmarketstructured/organized?•Whatistheroleplayedbytheswapban

7、k?•Howwilltheysplitthecostsavingsfromthetransctions?•Howtomakeaswapstrategy?TheroleofswapbanksFixedRatePayerPartyAPartyBFloatingRatePayerFloatingRatePayerFloatingRatePayerPartyASwapBankPartyBFixedRatePayerFixedRatePayerSwapMarketQuotationsSwapbankswilltailorthet

8、ermsofinterestrateandcurrencyswapstocustomers’needs.Theyalsomakeamarketin“plainvanilla”swapsandprovidequotesforthese