文档介绍：Chapter 21
Interest rate swaps, currency swaps and credit default swaps
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Learn borrows in another market (. floating) at BBSW + %.
One possible direct swap arrangement negotiable between firms A and B
B pays A a fixed rate of %
A pays B a floating rate of BBSW + %
Figure illustrates the flow of funds and benefits of this interest rate swap
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Interest rate swaps (cont.)
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Interest rate swaps (cont.)
The majority of swaps require the involvement of an intermediary, . merchant bank, that often seeks an offsetting ‘matched swap’
It enters into opposite swap transactions to offset its net swap exposure, making a profit through a spread between the rates
Figures and in the textbook illustrate intermediated interest rate swaps
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Interest rate swaps (cont.)
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Interest rate swaps (cont.)
Chapter organisation
Interest rate swaps
Rationale for the existence of interest rate swaps
Currency swaps
Rationale for the existence of currency swaps
Credit default swaps
Credit and settlements risks associated with swaps
Summary
Rationale for the existence of interest rate swaps
Reasons why the use of interest swaps has continued to grow
Lowering the cost of funds (comparative advantage)
Access gained to otherwise inaccessible debt markets
Hedge interest rate risk exposures
Profit margins locked in on economic transactions
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Rationale for the existence of interest rate swaps (cont.)
Lowering the net cost of funds (comparative advantage)
For a comparative advantage to exist, the advantage in the fixed market must be different from that in the floating market (. different risk premium)
Why does this occur?
Segmentation between floating and fixed debt markets
Some types of institutions lend more heavily in floating markets (commercial banks) while others lend more heavily in fixed markets (life