Example

The point of interest rate swaps is that they allow borrowers to separate the basis on which they pay interest from the underlying money market instrument used to actually borrow.

For example, a borrower who wants to pay a fixed annual interest rate on a loan with a maturity of one year, but can only receive financing in the form of short-term 3-month commercial paper, can use an interest rate swap that allows him to receive 3-month LIBOR and pay an annual fixed rate. Each time the 3-month commercial paper is redeemed, it simply renews itself.

Thus, on the loan, the borrower pays 3-month LIBOR, and on the swap, the borrower receives payment at 3-month LIBOR in exchange for paying an annual fixed interest rate. As a result of this exchange, his net payment is an annual fixed percentage.

Such a swap with a fixed / floating rate is called a simple interest rate swap (plain vanilla interest rate swap).

There are also swaps with a floating / floating rate, which are also called basis (basis swap) or differential (diff swap) swaps.

Conditions and characteristics

Positions that need to be negotiated when entering into an interest rate swap agreement include the following:

Effective date. The date from which interest begins to accrue on both sides of the swap. For simple interest rate swaps, this is the spot rate and the LIBOR rate fixed on the date of the transaction. The conditions here are the same as in the case of money market deposits.

Date of completion. The expiration date of the contract or repayment for which the final interest payment is calculated.

Conditional amount. The amount used to calculate the interest payments of both parties.

Fixed rate payer/beneficiary. Since in most swaps the payments are made by both parties, in one case at a fixed rate and in another at a floating rate, referring to counterparties as "buyer" and "seller" can be misleading. In this regard, one of the counterparties is usually referred to as the payer of the fixed rate, and the other as the recipient of the fixed rate.

The basis for calculating the interest rate. Includes all the elements needed to calculate interest payments, including:
- benchmark interest rate, for example LIBOR;
- payment periods and dates;
- the number of days in a year to calculate.

Commission for the organization of the transaction.

Operations with interest rate swaps in the market

Interest rate swaps are one of the most actively traded derivatives and an essential element of global capital markets.

According to the International Swap Dealers Association (ISDA), which reviews the market every six months, the total notional principal value of active IRS contracts as of June 30, 1997 was $22.115 trillion. In order to visualize the growth rate of this market more clearly, we note that just a year and a half ago, that is, at the end of 1995, this figure was two times lower.

ISDA figures show that the most common currency in interest rate swaps is the US dollar.

Swaps have been used in international financial markets for almost 30 years. In different situations, this derivative security creates confidence in its use and in the economic literature its definitions are interpreted in different ways (Fig. 8.2).

Swap contracts(from English Swap - exchange), as a type of derivative financial instruments used in international markets since the early 80s. First currency swap was developed in London in 1979, but was not widely used. Draws attention to this type of financial derivatives currency swap contract, in which Salomon Brothers, the World Bank and IBM became participants (1981). It was the high reputation of the participants in this swap that provided long-term credibility to this species derivatives

In 1982, a new type of contracts appeared - options on futures. These were options on Treasury bond futures. This year, the first swaps were also concluded - transactions that differed significantly from other derivatives and which subsequently took a leading position in the futures market. Swaps are based on a change in cash flow with some characteristics to a cash flow with other characteristics. One of the first officially mentioned swaps was the one associated with the issue in 1982. Deutsche Bank 7-year Eurobonds for a total amount of USD 300 million. In 1991, swap transactions were concluded in the amount of 4500 billion US dollars, which was half the value of shares issued in the world and a third of the value of outstanding bonds. To date, the swap market has outpaced all other derivatives markets combined.

Swap transactions are concluded for a period of several years to tens of years in order to eliminate currency or interest rate risk, as well as for arbitrage purposes. Swap transactions often involve financial intermediaries - commercial banks. They act as guarantors of the fulfillment of the terms of the agreement, taking on the risks of non-payment and currency risks. In this case, they become a third party to the agreement and receive a reward.

The main feature of swaps is mutual benefit, when, thanks to the exchange operations, both parties achieve the goal that they have set for themselves. Swap transactions are concluded when potential participants intend to take advantage of the opportunities of the other party, which they themselves do not have. So, both participants benefit from the swap contract, neither of them loses or wins, which makes it possible to reduce the cost of the swap operation. Swap contracts are relatively inexpensive risk hedging instruments and the interested party pays a commission of about 1% of the transaction amount for the operation.

There are various swap types:

simple- a standard swap concluded between two partners does not contain any additional conditions;

shock-absorbing- concluded between two partners, the estimated amount of which decreases evenly as the closing date of the transaction approaches;

growing- a swap, the estimated amount of which increases evenly;

complex (structured)- a swap involving several parties and several currencies;

active- changes the type of interest rate of the asset

passive- changes the type of the liability interest rate;

forward- concluded today, but which will start after a certain period of time. There are also other types of swaps, but they don't happen that often.

The main role in the swap market is played by interest rate and currency swaps, which in practice are often combined in one transaction.

=> Interest rate swap contract - is an agreement between two counterparties to exchange interest payments on a specified amount in order to establish lower borrowing costs. The contract is concluded on the over-the-counter market between financial and credit institutions for the base amount, from which the interest rate is calculated. At the end of the term, the balance is displayed: for one of the participants it is positive, for the second - negative.

Interest rate swaps used for such goals:

1) raising funds at a fixed rate when access to bond markets is not possible. With sufficient creditworthiness, a company takes out a loan at a floating rate, and then exchanges it with a swap for a fixed rate. As a result, funds are raised by the company at a fixed percentage;

2) attraction of funds at a rate lower than that prevailing on this moment in the bond or credit market. As a result of the swap, a highly creditworthy borrower raises funds at a floating rate, lower than that offered to him by banks. A borrower with low creditworthiness borrows funds at a fixed rate, which, taking into account its creditworthiness, could hardly be possible at all or would be higher;

3) restructuring of a portfolio of liabilities or assets without attracting new funds. In this case, with the help of swaps, the ratio between the shares of liabilities or assets with floating and fixed rates changes.

Most often, an interest rate swap is used to replace a fixed interest rate with a floating one, and less often to replace one floating rate with another.

When concluding swap transactions, participants are guided by unified international and national standards and rules. Contracts under each swap agreement are not concluded, the parties sign one agreement that governs all their further relationships when conducting swap operations. Swap agreements are made over the phone. It is not necessary that interest payments coincide in time. For example, one party may make monthly payments, while the other party may make quarterly payments. The minimum volume of swap transactions is USD 5 million.

Distinguish two types of interest rate swap contracts:

1) clean (plain or vanilla) - an agreement between partners on the exchange of interest-bearing obligations with a fixed rate for obligations with a floating rate. Swap payments are made in the amount of the difference between interest rates, and not in the amount of interest rates. An interest rate swap is not a loan agreement. Each borrower participating in the swap fulfills obligations to its creditor by paying both interest and principal;

2) basis swaps - transactions between participants on the exchange of a floating interest rate on debt calculated on one basis for a floating interest rate calculated on another basis; as a result, the floating rate is exchanged for a floating rate, but calculated on the basis of a different base rate.

=> Currency swap or swap with cross-currency rates - this is an agreement, the basis of which is the exchange of interest payments and face value in one currency for interest payments and face value in another currency.

Since a currency swap consists of buying and selling various cash flows in the future, it can be considered a type of forward transaction.

Currency swaps are used:

To manage currency and interest rate risks;

Market participants - to gain access to the desired currency at the required rate;

Banks - to balance their currency position;

To use their relative advantage in the market of a particular currency.

Swap transactions can be viewed as a package of forward contracts, however, unlike forward contracts, swaps are longer-term agreements, the term of which ranges from 2 to 15 years. Swap transactions are more liquid than forward transactions, especially if they are long-term forward transactions.

Compared to other derivatives, swaps have a number of advantages:

Both parties to the contract get the opportunity to achieve the set goal: hedging risk or reducing the cost of raising funds;

The cost of swaps is significantly lower than the cost of other hedging instruments, such as options, in addition, if mutually agreed, commissions on swap transactions may not be charged at all;

Transactions are concluded for any underlying instrument and period;

The swap market is well developed, and therefore the procedure for concluding swap contracts is easily implemented, the conditions are usually discussed over the phone;

The possibility of early exit from the swap operation in several ways: to enter into reverse swaps, when a new contract compensates for the effect of an existing one; when signing an agreement, it is possible to stipulate cases of termination of its validity, which allow each of the parties to terminate the contract for a certain fee;

Reducing the risk of this type of transaction, in the event of default by one of the parties, the losses of the other party are limited to contractual interest payments or exchange rate differences, and not the return of the principal amount of the debt.

However, swap contracts have some drawbacks, and among them is the existence of credit risk, albeit a small one. If the agreement is subject to real exchange amounts, the risk increases significantly. Since swaps are long-term derivative financial instruments, the level of risk during the life of the contract is constantly changing and requires constant monitoring. Third party guarantees, standby letters of credit, collateral or other forms of collateral are used to mitigate credit risk. With the same purpose, swap transactions can be concluded with the help of intermediaries acting as a clearing house and guarantee the fulfillment of all the conditions of the contract.

A new form of swap contracts is swaptions is a swap option. They give the right to one or both parties to make some changes or new conditions to the contract during the period of its validity. In general, the swap contracts market is currently developing most rapidly and has been occupying a leading position in the structure of the financial derivatives market over the past ten years. This is largely facilitated by the flexibility of these derivatives and the almost unlimited possibilities for designing new instruments based on swaps.

To other types of derivative securities relate:

* Certificate of security;

If depository receipts can represent the main security on foreign stock markets, then on the domestic market such a function is performed by a security certificate. Certificate- this is a document certifying a particular fact (for example, a certificate of product quality). If a share is a documented investment in the authorized capital of a company, then a share certificate is a documented confirmation of an investment in the authorized capital.

Share (bond) certificate - this is a document certifying the ownership of the relevant securities, as well as the right to own and dispose of one or more securities of one issue (series).

Order, or a subscription certificate giving its holders the right to purchase (subscribe) additional securities at a specified price at a specified time.

The task of the warrant is to interest potential investors in purchasing shares of new issues. The order is issued together with the underlying security, but may have independent circulation, rate, and other investment characteristics inherent in securities. Most often, the warrant is issued for a period of one to several years. It is, of course, a registered piece of paper. A warrant is different from a warrant or option certificate. Thus, a warrant gives the right to exchange one security for another; An option gives the right to buy and sell. In the case of an order we are talking only about the purchase (subscription).

Coupon - this is a tear-off (cut-off) part of a security, giving the right to receive income (interest), dividends on them within the terms established in it. Most often, a coupon is an attribute of a bond, which in this case is called a coupon. Regardless of whether a coupon is recognized as a security in a given country or not, it must be identified with the main bond without fail. To do this, it must contain: the name of the issuer, the name of the bond, the number of the bond and coupon, the amount and validity of the coupon, and, if necessary, the name of the paying agent (bank). Other details are also possible. As a rule, coupons are issued to bearer even if the underlying security is registered. The coupon is attached to the bond and is valid as a set with it. But it can exist outside the main paper as an attachment to it. In this case, it may be in circulation, have a rate, and may be officially recognized as a security.

To surrogate forms valuable papers also include:

Lottery tickets, insurance policies;

Compulsory money substitutes (receipts, control sales receipts, postage stamps, coupons)

Rekta papers (testament, executive inscription of a notary, arbitration or court decision), etc.

Interest rate swap

Structure

In an IRS transaction, each counterparty undertakes to pay a fixed or floating rate, denominated in one currency or another, in favor of the other counterparty. Fixed or floating rate multiplied by notional principal(say $1 million). Sharing this notional amount between counterparties, as a rule, is not carried out, it is used only to calculate the amount of interest cash flows to be exchanged.

Side A currently pays a floating rate but wants to pay a fixed rate. B currently paying a fixed rate, but wants to pay a floating rate.
At the conclusion of the IRS transaction, the net result is such that the parties can " exchange» your current interest obligations to your desired interest obligations.

The most common IRS is a transaction in which one counterparty (counterparty A) pays a fixed rate (swap rate) to the counterparty B, receiving a floating rate in return (usually linked to the base rate, such as LIBOR or MOSPRIME).

• A pays a fixed rate to B (BUT receives a floating rate)
• B pays a floating rate in favor of A (B receives a fixed rate).

Consider an IRS transaction in which the party BUT which has a loan (to a third party) at a floating rate of LIBOR + 150 (= + 1.50%), undertakes to pay in favor of the party B fixed periodic interest payments at 8.65% ( swap rate) in exchange for periodic interest payments at LIBOR+70 basis points (" bp", \u003d + 0.70 %). That is BUT has an "amount" from which he receives a fixed income on swap rate, but would like to have income at a floating rate, that is, the same as the loan obligations: LIBOR +. She turns to AT for the purpose of concluding an interest rate swap - a transaction in which BUT will receive income from the "amount" at the rate of LIBOR + instead of a fixed rate ( swap rate), a AT will receive income from its amount at a fixed rate instead of floating LIBOR+. Benefit for BUT is that the swap eliminates the discrepancy between the income from the "amount" and the cost of the loan - now they are both linked to the LIBOR rate.

It is worth paying attention to the fact that:

1. there is no exchange of principal between the parties and that
2. interest rates are applied to a "notional" (i.e. imaginary) principal amount.
3. interest payments are not paid in full, but are offset between the parties, after which the netting balance is paid.

, net.

The fixed rate (8.65% in this example) is called swap rate.

Picture: BUT receives a fixed income of 8.65% and pays LIBOR+1.50%. BUT wants to bring both streams to LIBOR+. BUT enters into a swap with AT- “redirects 8.65% income to him” (in reality, not all, but only the “netting” balance - the difference between 8.65% and LIBOR + 0.70%) and “receives LIBOR + 0.70% income”. Since the return on the asset is not explicitly shown in the figure, this can be misleading.

At the time of the transaction, the pricing of the swap is such that the swap has a current net value of zero (). If one side is willing to pay 50 bp over the swap rate, the other side must pay about 50 bp over LIBOR to make up for it.

Types

As an over-the-counter instrument, IRS transactions can be entered into on a variety of terms to meet the specific needs of the parties to the transaction.

The most common are exchange transactions:

The parties to a transaction can be in the same currency or in two different currencies. (Transactions in one currency are usually not possible, since the entire flow can be predicted from the very beginning of the transaction and it makes no sense for the parties to enter into an IRS contract, since they can immediately settle on known future interest payments).

Fixed-For-Floating, one currency

Side AT

• BUT and
• BUT, indexed by the curve X for a notional amount N for a period of T years.

(in reality, a transfer is made from A to B (or vice versa - depends on whose payment is greater) by the amount of the balance (netting) - the difference in "payments")

For example, you pay a flat rate of 5.32% monthly in exchange for Libor USD 1M also monthly for notional amount$1 million over 3 years.

The party that pays the fixed rate in exchange for the floating rate has a long IRS position. Interest rate swaps are, in fact, a simple exchange of one set of interest payments for another.

Swaps in the same currency are used to exchange

• assets / liabilities with a fixed rate on
• floating rate assets / liabilities and vice versa.

For example, if a company has

1. investment of 10 million USD with a yield of 1M USD Libor + 25bp with monthly fixing and payments

she can contract the IRS

According to him, she will:

1. pay floating USD rate 1M Libor+25 bp
2. receive a flat rate of 5.5%,
   thus fixing a profit of 20 bp.

Fixed-For-Floating, 2 currencies

Side P

• pays (receives) a fixed rate in foreign currency BUT and
• receives (pays) a floating rate in foreign currency B, indexed by the curve X for a notional amount N for a period of T years.

For example, you pay a flat rate of 5.32% quarterly on a notional amount in exchange for also quarterly on notional amount 1.2 billion yen over 3 years.

For a non-deliverable swap, the dollar equivalent of yen interest payments will be paid/received in accordance with the USD/JPY rate effective on the fixing date for the interest payment value date. There is no exchange of principal amounts. Payments only occur when:

• fixing date and
• the start date of the swap (if the start date of the swap starts in the distant future relative to the date of the transaction).

Swaps in 2 currencies are used to exchange

• assets / liabilities with a fixed rate in one currency per
• assets / liabilities with a floating rate in another currency and vice versa.

For example, if a company

1. It has
   • a loan with a fixed rate of 5.3% for 10 million USD with monthly interest payments and
   • investment of 1.2 billion JPY with a yield of 1M JPY Libor + 50bp with monthly fixing and payments and
2. wants to fix income in US dollars, expecting that
   • JPY 1M Libor will fall or
   • USDJPY will rise (the value of the yen will fall against the dollar)

she can enter into an IRS contract in two currencies, in which she will:

1. pay floating rate JPY 1M Libor+50bp
2. receive a flat rate of USD 5.6%,
   thus fixing a profit of 30bp on the interest rate and currency position.

Floating-For-Floating, one currency

Side P

• A, indexed by the curve X
• receives (pays) a floating rate in foreign currency A, indexed by the curve Y for a notional amount N for a period of T years.

For example, you pay a floating rate monthly in exchange for also monthly notional amount 1 billion yen over 3 years.

Swaps are used to hedge or speculate against widening or narrowing of the spread between two indices.

For example, if a company

If the company

she can enter into an IRS contract in one currency, in which she will, for example:

1. pay floating rate JPY TIBOR + 30 bps
2. receive floating rate JPY LIBOR + 35 bps,
   thus locking in a 35bp return on the interest rate instead of the current 40bp spread and index risk. The nature of the 5bp difference lies in the cost of the swap, which consists of
   1. market expectations of changes in the spread between indices and
   2. bid/offer of the spread, which is the commission of the swap dealer

Swaps are also used when using the same index, but

• with different interest payment dates or
• using different conventions for defining business days.

These swaps are practically not used by speculators, but they have importance for asset and liability management. An example is the 3M LIBOR swap,

• payable prior non-business day convention, quarterly according to the JAJO rule (i.e., January, April, July, October) on the 30th, against
• FMAN (i.e., February, May, August, November) 28 modified following.

Floating-For-Floating, 2 currencies

Side P

• pays (receives) a floating rate in foreign currency A, indexed by the curve X
• receives (pays) a floating rate in foreign currency B, indexed by the curve Y for a notional amount N at the original FX rate for the term T years.

For example, you pay a floating rate quarterly in the amount of USD 10 million in exchange for also monthly notional amount 1.2 billion yen (at the original FX rate of USD/JPY 120) over 4 years.

To understand this type of swap, consider an American company operating in Japan. To finance its development in Japan, the company needs 10 billion yen. The simplest solution for a company would be to issue bonds in Japan. Since the company may be new to the Japanese market and may not have the required reputation among Japanese investors, issuing bonds can be an expensive option. In addition to all of the above, a company may not have

• a proper bond issue insurance program in Japan and
• carry out advanced treasury functions in Japan

To solve these problems, the company can issue bonds in the United States and convert dollars into yen. Although these actions solve the first problems, they create new risks for the company:

• FX risk. If USDJPY rises by the maturity date of the bonds, then when the company converts yen into dollars to pay off the debt on the bonds, it will receive less dollars and, accordingly, incur exchange losses
• Interest risk on USD and JPY. If yen rates fall, then the company's return on investment in Japan may fall - this creates interest rate risk.

Currency risk can be eliminated by hedging using forward FX contracts, but this creates a new risk - the interest rate applied to determine the forward FX rate is fixed, while the return on investment in Japan has a floating structure.

Although there are several other options for hedging currency and interest rate risks, the simplest and most effective way is the conclusion of a swap in two currencies. In this case, the company raises funds by issuing dollar bonds and swaps them into US dollars.

As a result, she

• receives a floating rate in USD corresponding to its costs of servicing the bonds issued by it and
• pays a floating JPY rate corresponding to her return on yen investments.

Fixed-For-Fixed, 2 currencies

Side P

• pays (receives) a fixed rate in foreign currency A,
• receives (pays) a fixed rate in foreign currency B for a period of T years.

For example, you pay JPY 1.6% on notional amount 1.2 billion yen in exchange for USD 5.36% for the equivalent notional amount$10 million at the original FX rate of 120 USDJPY.

Other variations

Other options are possible, although they are less common. They are mainly intended for perfect hedging bonds, ensuring full compliance of interest payments - on bonds and swaps. These options can generate swaps in which the principal is paid in one or more payments, as opposed to regular swaps in which interest flows are simply exchanged - for example, to hedge coupon strip transactions.

Application

Hedging

Speculation

Pricing

More Rational pricing information

The value of a fixed leg is defined as the present value of the fixed interest payments known at the time of the transaction or at any time during its existence.

where - the swap rate - the number of fixed interest payment periods, - the nominal amount of the transaction, - the number of days in the interest period, - the financial base of the currency in accordance with the convention, and - the discount factor.

Also, the value of the floating leg of the swap is calculated based on the current value of the floating interest payments determined at the time of the transaction. However, it is only at the beginning of the swap that only the amounts of future interest payments on the fixed leg are known, while the forward interest rates are used to approximate the interest rates on the floating leg.

Each floating interest payment is calculated based on the forward interest rates for the respective payment dates. Using these rates results in a series of interest payments. Each flow is discounted using a zero-coupon rate. It also uses data from the rate curve available on the market. Zero-coupon rates are used because these rates describe interest-free bonds that generate only one cash flow - as in our case of calculation. Thus, the interest rate swap is treated as a series of zero-coupon bonds.

As a result, the value of the floating leg of the swap is calculated in the following way:

where is the number of floating interest payments, is the forward interest rate, is the nominal amount of the transaction, is the number of days in the interest period, is the financial base of the currency in accordance with the convention, and is the discount factor. The discount factor always starts at 1.

The factor is calculated as follows:

.

Fixed rate quoted under a swap transaction - a rate that gives the present value of fixed cash flows equal to the present value of floating interest flows, calculated at forward interest rates in effect on the settlement date:

At the time of the transaction, none of the parties to the contract has an advantage in the value of the legs of the swap, that is.

Consider a company with $300 million in liabilities and a maturity date of exactly 5 years. The interest rate on the loan is reviewed every 3 months (July 30, September 30, January 30, April 30) and is set on the basis of a 6-month rate +120 basis points. The financial director of the company is worried that due to high inflation, he will raise the key rate and the cost of funding will increase. Additional costs from the loan will need to be passed on to customers by raising product prices, which will reduce the company's competitiveness. If the director decides not to pass the cost on to clients, then the company's profitability will fall and have a negative impact on the company's share price.

Agreement percentage swap

The CFO enters into an interest rate swap agreement with a trader in the bank's brokerage department. The terms of the contract are reflected in the table.

Table. Terms agreements

The company will make payments at an annual rate of 1.82% at a par value of $300 million each quarter for five years. In exchange, the trader agrees to repay on the basis of a 3-month LIBOR rate every quarter for five years. The LIBOR rate for the future period is the spot value at the date of payment for the previous period. To mitigate credit risk, one of the parties will pay the difference between the payments.

Read more about the LIBOR rate in the article.

The transaction date is July 28, 2014. However, the swap contract comes into effect only from July 30, 2014, i.e. the interest on the swap begins to accrue only from July 30. The LIBOR rate for the first period is known in advance: it is 0.23%.

Payment 1: October 30, 2014

The first payment is made for the period from July 30 to October 30, 2014. The company must pay:

$300 million x 0.0182/4 = $1.36 million

The trader's payment is:

$300M x 0.0023/4 = $173K

Therefore, since the company's payment is higher, the company must transfer $1.36 million – $0.173 million = $1.187 million to the trader's account.

Payment 2: January 30, 2015

The second payment is made for the period from October 30, 2014 to January 30, 2015. The company still has to pay $1.36 million, which is required for the next calculation of the trader's payment, which is set on October 30, 2014. Assume that on October 30, 2014 LIBOR was 45 basis points. Therefore, the trader's obligation to the company will be:

$300M x 0.0045/4 = $338K

Thus, on January 30, 2015, the company will be obliged to pay the trader the difference between payments, which is:

$1.36 million – $0.338 million = $1.022 million

The floating LIBOR rate for the next payment is reset on 30 January 2015.

Swap payments and

Due to the fact that it involves the exchange of payments four times a year, and its validity period lasts 5 years, the counterparties will exchange payments 20 times. The last payment falls on July 30, 2015. Companies that hedge interest rate risk with swaps typically match the swap payment date with the interest payment date of the loan.

In the considered example, the first two payments were made from the company to the trader. This situation is typical for the normal form , i.e. the curve has a positive slope, which indicates the expectation of an increase in interest rates. The influx of funds to the trader serves as a kind of safety cushion for the trader in the event of a rapid increase in rates.

The profitability of the deal for the two parties will depend on the actual rate movement during the swap contract. If the LIBOR rate rises faster than market expectations, then the company will be in profit. Otherwise, the company may incur a loss from the transaction.

Hello, friends. They sent me on a business trip last week.

It took two days to conduct training for employees of one of our branches.

Most of the time was spent on the story about SWAP - what it is and what are the main features. It's good that the employees grasped everything on the fly and did not ask unnecessary questions.

A lot of useful material has accumulated, so now, dear readers, I will conduct a detailed analysis of this topic for you. So, let's start without swinging.

We explain the concept of "swap" in simple words

Everyone knows that a swap is a commission for the right to transfer a transaction to the next day. But this word is a more capacious financial concept than the one used by traders in their lexicon.

Consider swap - what is it in simple terms and, at the same time, in scientific language.

From the point of view of science

Swap - is an agreement that allows assets or liabilities to be temporarily exchanged for other liabilities (assets). Such a right is usually used to improve the structure of liabilities and assets, as well as to reduce risks.

The structure of the agreement is two parts. In the first part, the primary exchange is made. In the second part, closing is performed (the so-called reverse exchange).

What types are:

1. Currency swap is a currency swap.
2. En:stock swap - promotional.
3. precious metals.
4. En:interest rate swap - percentage.

Currency. In a currency swap, two operations are carried out to buy and sell a certain amount of currency, which have different dates for value setting.

That is, such a swap has two dates when currencies are exchanged. This is the most common market instrument, which occupies a significant percentage in the total turnover.

It is used for differential interest rate speculation, dealing room cash management, internal and external clientele, and arbitrage to profit from price differences.

Share Swap. This is an exchange of streams of payments based on a total return given some stock index and some interest rate with a constant or variable component.

That is, there are two signs - features of shares (securities) and at the same time interest payments (fixed or floating).

Such a product expands investment opportunities when pouring into stock markets in developing countries, which includes Russia.

Swap of precious metals. A transaction in which a purchase/sale of a precious metal occurs and at the same time a reverse transaction (purchase/sale) is carried out.

It should be noted that such transactions do not have such a strong impact on the precious metals market, such as spot transactions.

Percentage. What is an interest rate swap plain language? So, two parties enter into an agreement to exchange cash flows denominated in the same currency, but with different bases.

That is, an exchange of interest rates is carried out when an interest rate with a fixed value is exchanged for a floating one or vice versa.

The parties to the agreement, having received borrowed funds, want to improve conditions for themselves, and therefore enter into an interest rate swap. Moreover, the parties may have different goals. Someone, by changing the rate, hedges the risk of changes in loan rates.

And someone wants to raise funds with a fixed rate, and then with a floating one.

Borrowers of funds exchange interest payment terms directly between themselves by transferring the percentage difference to each other.

So swap, what is it in simple words - the exchange of something for a while. For example, you are going to the USA and I am going to the UK. You have euros, I have dollars.

Together we decided to exchange this money, well, just in case, all of a sudden there is still not enough there. You give me euros and I give you dollars. Upon return, we will make a return exchange.

In general, nothing like that happened, but the risk that each of us did not have enough money was much reduced.

Why do you need to know this if you are not a participant in the Forex market or the stock market? Well, at least for erudition and in order to roughly understand what smart uncles are talking about there. Traders should not confuse this concept with the swap column for trades.

Source: http://site/fx-binar.ru/chto-takoe-svop-prostymi-slovami/

What is Swap in Forex?

The concept of swap has two meanings. Let's consider them in more detail separately. On the Forex platform, such a term as a currency swap is often used.

Currency swap (currency swap) is a combination that is based on two transactions that are opposite in direction, but have the same currency and the same volume. The value dates for this operation are also different.

Such transactions can be concluded for quite a long terms(up to the 1st year). Longer periods, in fact, are not amenable to any forecasts, and this greatly complicates the calculation of the financial result from such transactions.

Swap on the Forex exchange is divided into 2 types depending on the order of the operation. Buy-swap - this option implies that the purchase of a currency will be implemented first, and then its sale.

In the second case, a Sell-swap is used - the first transaction in time is the sale of the currency, then the transaction is closed by its purchase.

The size of the commission depends on the type of transaction being carried out, this parameter is not constant. This aspect should also not be forgotten. In addition, the swap can be constructed and clean.

In the pure version, the operation is performed with one counterparty. If an additional participant is involved for its implementation, then swapping will have a constructed character.

Depending on the time, swaps are divided into the following groups:

• On forward terms - the settlement date for the first transaction is realized on forward terms, for the last one - on spot.
• Intraday – no commission is charged for position rollover, the operation is closed in one business day.
• Standard - the farthest settlement date is performed according to forward conditions, and the nearest one - according to spot.

When concluding transactions, an important role is played by the calculation of the swap cost. In this case, the following indicators are taken into account: the current exchange rate and interest rates.

Typically, brokerage companies fix the swap value for each currency pair, so a trader can find out the cost of transferring a position without preliminary calculations.

Also, the commission charged can have different signs (positive/negative). With a positive swap, a certain percentage is charged to the trader.

Source: http://site/workon.ru/chto-takoe-swap-na-birzhe-forex/

Transactions in the Forex market are concluded on spot terms. This means that for all transactions concluded on the current business day, the entire amount of the base currency must be delivered on the second business day.

In the case of margin trading, there is no real delivery, and in order to avoid delivery, it is necessary to make a SWAP transaction, i.e. close the position at the current rate on the previous value date and reopen it at the current rate, taking into account SWAP points, on the next value date.

Operation SWAP (in this case SWAP tom/next) is a standard banking operation and allows you to move the date of the actual delivery of the currency forward by a day.

This operation is performed for all remaining open positions at 23:59 system time (GMT+2).

After performing the SWAP operation on the Trading tab of the terminal, you will see that your yesterday's positions are closed and reopened. The closing and opening rates differ by a certain amount - SWAP points.

Attention!

The number of these SWAP points is calculated depending on the discount rates for each currency, and can be either positive or negative.

After the SWAP operation, only the amount of the result remains unsettled for the parties, i.e. profit or loss recorded in your account as a result of a SWAP transaction.

At the same time, you need to understand that SWAP itself has almost no effect on the final result of your transaction, with the exception of SWAP points.

Consider the figure:

1. Level A is the moment of opening a position at a price of 1
2. Level B is the moment of transferring the position to the next day, closing and opening at a price of 2
3. Level C is the moment of closing a position at a price of 3

It is easy to see that the difference between prices A and C (the profit and loss you get) is the sum of the difference between prices A and B and prices B and C,

That is (C - A) \u003d (B - A) + (C - B)

How SWAP points are calculated

For the currency of each country, its Central Bank sets the discount rate. Different countries have different rates, and the difference can be very significant (for example, the USD discount rate is twice the EUR discount rate).

When, for example, you make a transaction to sell EUR for USD, you are actually giving away a currency (EUR) with a lower interest rate, and in return you receive another currency (USD) with a higher one.

The minimum term of a bank loan is one day and even for such short term banks charge interest on the amounts used in your work.

In this example, when you sold EUR for USD, the bank will pay you extra for every day you are in this position. And vice versa, if you buy EUR for USD, you will already pay extra to the bank for each transfer of the position to the next day.

For example, there is a long position (purchase) of EUR at 1.4390. It does not close on the same day, at 23:59 a sell/buy swap is performed in the system at the current Bid price in the System, taking into account SWAP points. Now EUR SWAP points = -0.13/-0.02

SWAP for positions remaining from Wednesday to Thursday is a long SWAP, because the value date of a new opened position is Monday and SWAP points are taken for 3 days.

Source: http://website/forex.ukrgasbank.com/rus/metatrader/swap/

Swap overnight (Fee for an unclosed trade)

A currency swap implies a fee for transferring a position through the night, that is, it is a kind of penalty for the fact that the trader did not close the deal on the day it was opened. The swap can be either positive or negative.

A positive swap is charged to the client if he has purchased national currency countries with a higher bank discount rate, and is charged from the client in case of buying the currency of a country with a lower discount rate.

The swap is independent of margin requirements and account sizes.

When trading, keep in mind that the swap is charged for each day of holding the position in equal amounts, but from Wednesday to Thursday, a triple swap is charged, since the date of the swap operation from Wednesday to Thursday is considered to be Friday and Monday.

Currency swaps, depending on the timing of their implementation, are divided into three types:

• forward - they are characterized by combinations of transactions, when the closest transaction is concluded on the condition that the value date is later than the swap, and the reverse - on the terms of a late forward.
• standard - they are characterized by the closest value date - spot, and the farthest - forward.
• short or overnight swaps.

To better understand what a swap is, let's consider an example with a currency pair, but for ease of calculation, we will change the interest rates of states. The trader opened a trading position to sell one lot on the EUR/USD currency pair.

A trader sells 100,000 euros, having previously borrowed them at 4% per annum. In exchange, the exchange speculator bought US dollars and put them on a bank deposit at 3% per annum. The amount of transaction costs is 1% (4% - 3%).

1% taken from 100 thousand euros is 1250 US dollars. If you divide this amount by 365 days, you get approximately $3.4 per day. This is the swap.

To determine whether it is positive or negative, it is necessary to compare the interest rates of the two countries. In this example, the deposit rate is 3%, and the credit rate is 4%.

That is, the trader's credit does not cover his deposit. Thus, if he sells euros, then every day his trading account will be debited with a swap of 3.4 US dollars.

If a trader decides to buy euros, then his deposit rate will exceed the credit rate, therefore, this amount will be credited to his trading account.

Source: http://website/www.teletrade.com.ua/novice/glossary/svop-overnight

Interest rate swap

An interest rate swap is an off-exchange transaction in which two parties exchange interest payments on loans of equal size but at different interest rates.

Interest rate swaps are usually long-term instruments, the purpose of which is similar to the purpose of an agreement on a future interest rate, however, for major currencies, the duration is from 2 to 10 years.

Attention!

An interest rate swap is an agreement between parties to make a series of payments to each other on agreed dates before the agreement expires.

The amount of interest payments of each party is calculated on the basis of different formulas, based on the notional principal amount of the agreement.

A typical transaction of this kind involves exchanging the interest payment on a fixed rate instrument, such as a coupon bond, for a floating rate interest payment.

Interest rate swaps are traded on the OTC market and are one of the most common money market instruments in the world.

The simplest instruments include a fixed/floating rate swap, in which one of the counterparties makes payments at a fixed interest rate, and the other at a floating rate linked to a reference rate, such as LIBOR.

Since an interest rate swap does not involve the delivery of principal, interest is charged on the notional amount.

An interest rate swap is an instrument of two counterparties who borrow the same amount at different interest rates and then exchange interest payments.

Since there is no exchange of principal, the credit risk is limited to the interest payments received from the counterparty.

Most often, only the difference between the gross interest payments of counterparties is paid in settlement, so credit risk is limited to net cash flow.

The point of interest rate swaps is that they allow borrowers to separate the basis on which they pay interest from the underlying money market instrument used to actually borrow.

For example, a borrower who wants to pay a fixed annual interest rate on a loan with a maturity of one year, but can only receive financing in the form of short-term 3-month commercial paper, can use an interest rate swap that allows him to receive 3-month LIBOR and pay an annual fixed rate.

Each time the 3-month commercial paper is redeemed, it simply renews itself.

Thus, on the loan, the borrower pays 3-month LIBOR, and on the swap, the borrower receives payment at 3-month LIBOR in exchange for paying an annual fixed interest rate. As a result of this exchange, his net payment is an annual fixed percentage.

Such a swap with a fixed / floating rate is called a simple interest rate swap (plain vanilla interest rate swap).

There are also swaps with a floating / floating rate, which are also called basis (basis swap) or differential (diff swap) swaps.

Conditions and characteristics

Positions that need to be negotiated when entering into an interest rate swap agreement include the following:

Effective date. The date from which interest begins to accrue on both sides of the swap.

Date of completion. The expiration date of the contract or repayment for which the final interest payment is calculated.

Conditional amount. The amount used to calculate the interest payments of both parties.

Fixed rate payer/beneficiary. Since in most swaps the payments are made by both parties, in one case at a fixed rate and in another at a floating rate, referring to counterparties as "buyer" and "seller" can be misleading.

In this regard, one of the counterparties is usually referred to as the payer of the fixed rate, and the other as the recipient of the fixed rate.

The basis for calculating the interest rate. Includes all the elements needed to calculate interest payments, including:

1. benchmark interest rate, such as LIBOR;
2. payment periods and dates;
3. number of days in a year to calculate.

Operations with interest rate swaps in the market

Interest rate swaps are one of the most actively traded derivatives and an essential element of global capital markets.

The previous example showed how an interest rate swap allows a borrower to pay a fixed annual rate even if it has only 3-month money market instruments at its disposal.

Attention!

It is access to various markets, combined with the high liquidity of the swap market, that makes the IRS such an attractive tool for borrowers.

The advantage of interest rate swaps is that they allow borrowers to hedge the interest rate they must pay on loans for a specified period in the future.

While a future interest rate agreement provides an opportunity to lock in the interest rate for a 3-month period starting in three months, an interest rate swap extends this period to 30 years starting from the current day.

This opens up the possibility for borrowers who cannot enter the long-term debt market, for example because of an insufficiently high credit rating, to raise funds in the short-term money market and pay as a result of an exchange of long-term interest rates.

Borrowers thus gain greater certainty in financing long-term projects and the chance to complete projects that would otherwise be too risky due to the possible rise in interest rates.

Note. In the first section, we focused on how governments and central banks use interest rates to dampen or stimulate economic activity.

So, business projects financed at a fixed rate through interest rate swaps are immune to higher interest rates.

Of course, there is always a downside - the exchange of borrowing rates for long-term fixed does not allow you to benefit from lower interest rates.

Note that interest rate swaps are used not only by borrowers. Speculators also find them attractive because, in the absence of an exchange of principal, they allow for leverage.

Grade

An interest rate swap has no value for any of the counterparties in the initial period of its validity.

The reason for this is that the fixed rate side of the swap is valued at an average percentage that over time becomes equal to the expected future value of the floating rate payments.

The present value of the floating rate payments is calculated based on the forward rates of each payment period over the life of the swap, with each payment subsequently discounted.

An interest rate swap brings profit or loss to counterparties only if the interest rates differ from the forward rates.

In other words, the counterparty can profit from the IRS only if the future situation does not coincide with the forecast of forward markets.

If, during the life of the contract, interest rates rise or fall in line with forward market forecasts, neither counterparty will make a profit or loss.

Yield curves for swaps

We have already considered the yield curve, which is a graph of the dependence of interest rates on the term, in relation to money market and debt market instruments.

The same curve in the coordinates "interest rate - term" can be built for swaps.

The swap yield curve is a graphical representation of fixed rates on interest rate swaps versus maturity.

For valuation purposes, an interest rate swap can be thought of as a series of coupon payments on a fictitious fixed-rate synthetic bond on the fixed-rate side against a series of interest payments on a fictitious synthetic floating-rate note (FRN) on the floating-rate side.

The swap yield curve can be thought of as the yield curve of synthetic fixed-rate bonds.

A swap pricing approach based on the difference between the value of a common bond and the value of a floating rate instrument allows market makers to hedge or "stock" the swap position by temporarily buying or selling the underlying bond.

The fixed rate payer buys the underlying instrument, which it can then sell to offset the position if the swap rates fall.

The recipient of the fixed rate sells the underlying instrument to make up for losses in the event of an increase in swap rates.

The calculations here are quite complex and time consuming. In practice, traders often use charts to evaluate a swap against instruments with that maturity as a benchmark.

A similar schedule is, in particular, the spot rate curve (spot curve), or the zero coupon yield curve (zero coupon yield curve).

Attention!

The yield-to-maturity (YTM) curve for bonds is simply a plot of YTM values ​​versus maturity. Unfortunately, this approach oversimplifies the situation, so it would be more correct to use the spot rate vs. term chart.

The spot rate is a measure of the YTM of a financial instrument at any point in time, which takes into account various market factors.

The spot rate-term schedule is called the spot rate curve or the zero coupon yield curve, because the spot rate on an instrument is equivalent to the yield on an instrument with no coupon payments, that is, an instrument with a zero coupon.

This means that the spot rates of a series of instruments with zero coupons and different maturities can be compared directly.

The curves reflect the relationship between the yield of an instrument and its maturity, usually measured in years. Depending on the shape, the curve can be:

• positive;
• negative (reverse).

Positive yield curve. In this case, short-term interest rates are lower than long-term ones. This is the situation most often observed: the longer the investment period, the higher the income paid.

In anticipation of an increase in interest rates, investors begin to invest assets in long-term instruments, which causes a decrease in short-term rates and an increase in long-term ones.

Negative or inverse yield curve. When short-term rates fall, investors move their investments into long-term financial instruments in order to earn a higher return.

An increase in the supply of long-term financial resources causes a decrease in long-term rates.

Yield curves allow you to identify differences in financial instruments with similar credit characteristics, such as an interest rate swap and a Treasury bond with the same maturity. How can you use a spot rate curve to value a swap?

For greater accuracy, let's represent the interest rate swap as consecutive fixed rate cash flows on the one hand, combined with consecutive floating rate notional cash flows on the other hand, which can be thought of as a strip of FRA or futures contracts.

The rate values ​​determined from the curve allow you to pre-calculate the net payment amount for each future due date.

The swap rate is actually equal to average rate strip FRA or futures contracts.

Source: http://site/fx-fin.net/instr_denr/proc_sv.html

What are swap points

A swap occurs when a transaction is postponed to the next day. A swap (Rolover or Overnight) is the opening of two opposite trades with different value dates. The rate of these transactions, however, is calculated at the time of their completion.

The first deal ends the current deal, and the second one opens a new one. The need for this operation arises when the transaction is transferred through the night.

For example, if a participant opened a EUR/USD deal during the daytime, then after the end of the calendar day, the same deal is opened again at the time of the new day.

A swap can be both profitable for a trader and unprofitable. This will depend on the difference in the interest rates of the currencies involved in the pair, as well as (to a lesser extent) on the brokerage company with which you cooperate.

Usually, you can find out the current values ​​of accrual/debit of the swap amount on the website of your broker.

From Wednesday to Thursday, a triple swap is charged/written off.

The fact is that the swap calculation for a deal opened on Wednesday is made on Friday, and, therefore, the swap rate of the rollover rate will be calculated on the next business day, i.e. on Monday. Therefore, there is a swap for 3 days.

Source: http://site/xdirect.ua/study/faq-novichka/chto-takoe-svop-punkty

credit default swap

A credit default swap is one of four types of swaps. The other three are simple interest rate swaps, index swaps, and currency swaps.

On the English language credit default swap. Abbreviated - CDS, in Russian - CDS. Another possible full name for CDS in Russian is credit default swap.

A credit default swap is a contract between two parties. The first party is exposed to the risk of non-repayment of the loan, it has a demand for risk protection and it is called the buyer of protection.

The second party offers such protection, and it is called the seller of protection.

Attention!

The credit default swap is an American invention. The first signs of its discovery in life date back to the beginning of the 90s of the last century. However, the actual birth of these contracts is 2003. This year, their market begins to develop rapidly.

After 3 years, their value becomes equal to the volume of world GDP. After 4 years, contracts were signed for 62 trillion dollars.

This means that there are more credit default swaps than the goods and services produced in the world in 2007 by 1.3 times.

One reason for the boom in such swaps is that they are outside of exchange trading. Transactions on them were also not sent to regulatory authorities.

Acting as a semblance of credit insurance and hedging, they, however, also did not fall under the relevant regulation in this capacity.

Another reason for the boom is the development of “naked” credit default swaps linked to the debt obligations of “reference” entities, which allowed traders to speculate on the issuance of debt.

This boom, in turn, was one of the causes of the global financial and economic crisis of 2008-2010. During the first year of the crisis, the volume of credit default swaps shrunk to $38 trillion, that is, 1.8 times.

Source: http://site/dictionary-economics.ru/word/Credit-default-swap

Currency swap Forex: essence, features, varieties

The process of currency investment in Forex is necessarily associated with such a concept as a swap. What is a swap?

Traditionally, from the economy, this indicator reflects a combination of two transactions for the exchange of foreign exchange assets of different directions (purchase and sale). In addition, each of the exchange transactions is characterized by its own date of implementation.

In the application to Forex, a swap means a positive or negative balance on a transaction (specifically in terms of exchange), caused by the difference in rates on the date of the previous and current trading day.

One way or another, some of them will be associated with independent income or expenses on contracts that have been active for more than a day - this is reflected in the “swap” column.

essence

Currency swap is especially relevant for those traders who work in the medium or long term. This is explained by the fact that intraday transactions are not associated with expenses and incomes of this type.

The essence of the occurrence of this difference is associated with a change in the commercial exchange rate characteristic of a particular date.

It is clear that if the exchange rate of the selected pair is constantly changing either up or down, then the total swap remains unstable.

Peculiarities

Since a swap deal is a multidirectional currency exchange operation, it has certain features. Their study allows you to better understand the mechanism of creating an exchange difference.

Secondly, the recalculation of the financial indicators for the transaction occurs during weekdays at 21:00 GMT, regardless of when the transaction was opened.

In fact, it turns out that brokers close all active positions daily from Monday to Friday at 21:00 and open them again using the new currency exchange rate.

Thirdly, the size of the swap is determined not only by the exchange rate, but also by the commission of the broker (dealing center) for transferring the position in a day.

So, for example, if a trader purchases a currency with an increased discount rate of the World Bank, then the difference is reflected in his account in the form of a positive balance. But this difference is reduced by the amount of the commission of the intermediary organization.

Fourth, the size of the swap difference depends on the volume of the transaction. Since the rate and discount rate for a particular currency is calculated for each unit of funds, the amount of capital involved in a particular contract directly affects the size of the swap difference.

positive and negative

There are two types of swap:

1. positive difference;
2. negative difference.

Above, we superficially drew attention to how a positive balance is formed. But let's take a closer look at both types.

The interest rate differential affects the formation of the swap. Otherwise, it is called the difference in the discount rate of interest of national banks (derived by analyzing the exchange rates of the leading national banks that are directly related to the considered currencies included in the pair).

Also, the size of the swap is influenced by the size of the commission of the dealing center. Moreover, according to the principle of the impact of the percentage differential, the difference can be both positive and negative, and according to the principle of charging a brokerage commission, it can only be negative.

A positive swap is formed if, before 21:00 GMT, the discount rate of the World Bank on the exchange of the considered currencies included in the pair was lower than after the specified time.

This difference is slightly reduced by deducting commission income for the dealing center for the rollover of the position through the trading day.

A negative swap is formed if, before 21:00 GMT, the discount rate of the World Bank on the exchange of the foreign exchange assets in question was higher than after the specified time.

This difference is increased by deducting (and in this case - accruing) the commission of the dealing center for the transfer of the position through the trading day.

Example

To better understand the intricacies of this difference that takes place in Forex, let's consider a practical example of swap calculation.

Suppose we are working on the Pound/Dollar pair. The interest rate in the UK is 6% and in the US it is 3%. Let's take the exchange rate at 1.9800.

At the same time, let's say that a deal to buy or sell is concluded with a volume of 1 lot (100,000 units of the currency that acts as the base).

The swap difference will be calculated as follows: (((6% - 3%) * 1 * 100,000 * 1.9800) / 100%) = $5940/year. By distributing this amount evenly over the number of days in a year, we get a swap per day: 5940/365 (366) = $16.27/day.

At the same time, it is important to understand the basic principle of operation of such an exchange mechanism. If a buy contract is opened for the Pound/Dollar pair, then actually 100,000 US dollars are lent (in this case, borrowed) at 3% per annum and 1.98 times less than pounds sterling is placed on deposit at 6% per annum.

If a sell contract is opened for the Pound/Dollar pair, then the opposite operation takes place.

In this case, pounds sterling is borrowed at 6% per annum, and US dollars are placed on deposit at 3% per annum.

In these situations, an inverse relationship is observed: in the first case, the deposit rate is higher than the credit rate, and in the second case, the credit rate exceeds the deposit one.

Therefore, when opening a deal to buy, a positive swap is formed, and when selling, it is negative. Based on our example, a long position would result in $16.27 being credited to the account, and a short position would result in a write-off of this amount.

However, it should be borne in mind that there is a “spot” system in Forex. Under its terms, settlements are made within the second business day. Taking into account the inactivity of the market on Saturday and Sunday, when the transaction is postponed to Thursday, the swap is charged for three days.

Attention!

So, a currency swap is a mandatory commission that every trader in the market pays. It is due to the interaction of two indicators: the amount of remuneration of the dealing center for transferring a position through the trading day and the percentage differential of national banks.

The swap can be both positive and negative - it depends on the discount rate in national banks for the currencies included in the pair.

The currency swap calculation mechanism is very simple: if the deposit ratio is higher than the credit ratio, then a positive difference is formed, and if vice versa, it is negative.

Using pairs with the maximum difference in rates, you can manipulate the type of currency swap. Among the pairs most suitable for this are the Australian dollar/Japanese yen and the New Zealand dollar/Japanese yen.