Proteins
BASICS OF INTEREST RATE SWAPS
A swap is an agreement between two institutions to exchange future cash flows. Suppose there is a bank receiving fixed 8% return on 2 year money lent. This bank can swap its revenue stream against another firm’s variable rate 2 year money. In practice swaps tend to be more complicated and can involve more simultaneous variations of interest rates and currency as well.
When settled, only the differential between the would-be payments are exchanged between two parties and not the principal.
IRS are generally unknown to the public at large as they are relatively unregulated OTC derivatives that don’t trade on public exchanges.
Definition
An interest rate swap is a contractual agreement entered into between two counterparties under which each agrees to make periodic payment to the other for an agreed period of time based upon a notional amount of principal. The principal amount is notional because there is no need to exchange actual amounts of principal in a single currency transaction: there is no foreign exchange component to be taken account of. Equally, however, a notional amount of principal is required in order to compute the actual cash amounts that will be periodically exchanged.
FEATURES:
Interest Rate Swap Situation
A bank needs to balance its floating interest rate portfolio with more fixed rate loans, so it contacts a company who has a high percentage of fixed rate loans and offers to do an interest rate swap.
Interest Rate Swap Terms
The two companies negotiate and, depending on the current economic climate and the prevailing interest rates, one party might have to pay one-quarter of a point or so above the usual swap rate to get the deal done. A duration for the swap is decided which is genereally 1-15 years, then settlement dates specified and the settlement period begins.
Settlement Dates
Settlement dates are when it is time to pay up if your end of the swap was the loser. Until the settlement dates,
A swap is an agreement between two institutions to exchange future cash flows. Suppose there is a bank receiving fixed 8% return on 2 year money lent. This bank can swap its revenue stream against another firm’s variable rate 2 year money. In practice swaps tend to be more complicated and can involve more simultaneous variations of interest rates and currency as well.
When settled, only the differential between the would-be payments are exchanged between two parties and not the principal.
IRS are generally unknown to the public at large as they are relatively unregulated OTC derivatives that don’t trade on public exchanges.
Definition
An interest rate swap is a contractual agreement entered into between two counterparties under which each agrees to make periodic payment to the other for an agreed period of time based upon a notional amount of principal. The principal amount is notional because there is no need to exchange actual amounts of principal in a single currency transaction: there is no foreign exchange component to be taken account of. Equally, however, a notional amount of principal is required in order to compute the actual cash amounts that will be periodically exchanged.
FEATURES:
Interest Rate Swap Situation
A bank needs to balance its floating interest rate portfolio with more fixed rate loans, so it contacts a company who has a high percentage of fixed rate loans and offers to do an interest rate swap.
Interest Rate Swap Terms
The two companies negotiate and, depending on the current economic climate and the prevailing interest rates, one party might have to pay one-quarter of a point or so above the usual swap rate to get the deal done. A duration for the swap is decided which is genereally 1-15 years, then settlement dates specified and the settlement period begins.
Settlement Dates
Settlement dates are when it is time to pay up if your end of the swap was the loser. Until the settlement dates,