Interest rate swaps are agreements to exchange series of payments. At the same time, one party pays a fixed interest, while the other pays a floating one. In essence, this process resembles an exchange with a fixed rate for securities with a floating, pegged to LIBOR (London Interbank Offered Rate) or Mosprime ( independent indicative rate for granting ruble loans (deposits).

Given that interest rate swaps are classified as off-exchange assets, transactions on them are concluded between organizations such as brokerage companies, banks, hedge funds.

Interest rate swaps

There are several options for interest rate swaps. In particular, they include:

• exchange of payments with a fixed rate for payments with a floating one;
• exchange of payments with a fixed rate for payments with a fixed rate;
• exchange of floating rate payments for floating rate payments.

Such agreements can be used for speculative purposes. Profit in this case obtained from the difference in indicative rates. How it works? Suppose you want to make money on the difference in rates. Yields are expected to rise after the central bank raises rates. In this case, it is possible to use in which payment is made at a fixed percentage. You get a Mosprime bet and additional margin. If your calculations turn out to be correct and the rate goes up, then the Mosprime rate will also go up. To fix profits, you can conduct a reverse transaction.

With regard to arbitrage, you can work on the basis of changes in either one or both of the indicative rates. for the future period can be obtained by combining short-term futures contracts for rates. Naturally, with changes in indicative rates, the result will also change. Otherwise, you can use the arbitration operation.

Such swaps are used mainly in the foreign exchange market. As for their returns, they can often be lower than the returns on monetary assets. True, during arbitration operations it can be increased.

If you find an error, please highlight a piece of text and click Ctrl+Enter.

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 company's chief financial officer is worried that due to high inflation, it will raise 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.

More about LIBOR 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.

Lenders are always interested in returning their money on time, in full, and without losing their value. That is, in any case, they want to insure themselves against such unforeseen situations as default, inflation, economic crisis and other similar ones. One of the effective solutions to this issue is the use of such a financial instrument as a swap. It will be discussed in this article.

In the Central Bank, the conclusion of currency swaps is possible in two ways:

• sale of US dollars for Russian rubles and their purchase;
• buying and selling euros national currency RF.

The Bank executes transactions exclusively on an overnight basis. That is, the purchase of currency takes place for rubles, with a settlement period of "today" and at today's rate.

The sale is already made with a settlement date for "tomorrow" and at the same rate, but increased by the difference between the two directions of exchange. In fact, the entire operation takes place in one night. Hence the name of the swap.

The conditions, parameters and volumes of currency swaps of the Central Bank are reviewed daily and published on its official Internet resource. These values ​​look like this:

Encyclopedic YouTube

1 / 5

✪ Interest rate swap 1

✪ Interest rate swap 2

✪ Currency swap (swap)

✪ Credit default swap

✪ What is forex swap? Forex currency swaps

Subtitles

Suppose there is a company A and it borrows the amount of $1 million and pays interest on this loan at a variable rate. She pays LIBOR plus 2%. And LIBOR is the London Interbank Offered Rate. This is one of the main benchmarks for variable interest rates. The company pays it to some creditor. This is the person who loaned money to company A. She pays him at a variable interest rate with some periodicity. For example, in the first period, if LIBOR is 5%, then for this period company A will pay the creditor 7%, that is, $70,000. In the second period, if LIBOR drops slightly to 4%, company A will pay (4 + 2), which is equal to 6%, that is $60,000. Let's say there is another company. Company B. It also borrows $1 million at a fixed rate. Let her borrow them at a fixed rate of 8%. That is, for each period—regardless of what happens to LIBOR or any other criterion—she may borrow money from the same lender that she borrowed A from. It could be a bank or another company, or some investor. We'll call them Lender 1 and Lender 2. Regardless of the period, right now Company B will pay 8% of $1 million each period, which equals $80,000, which is exactly $80,000 each period. Now imagine that none of these parties is happy with this situation. Company A does not like the volatility, the unpredictability of what will happen to LIBOR, because it cannot plan its payments. Company B seems to be overpaying interest. It seems to her that those who pay the variable interest rate pay less interest each period. Maybe company B also thinks that interest rates will go down, that is, that in the near future the variable rate will go down, LIBOR will decrease. This is the main reason why B wants to get a variable rate loan. What should they do? Neither company can withdraw from these debt agreements, but they can agree, in effect, to exchange some or all of the interest payments. For example, they may enter into an agreement called " interest rate swap when company A agrees to pay B - let's say 7% on a notional amount of $1 million. That is, 1 million will not change hands, but Company A agrees to pay B 7% of this notional $1 million, or $70,000 per period. In return, Company B agrees to pay A a variable percentage. Let's say it's LIBOR plus 1%, right here. Here is such an agreement. They agreed on such conditions for a certain amount of money. That would be equal to LIBOR plus 1% on an imaginary $1 million. The word "imaginary" means that this $1 million will not change hands, the companies will only exchange interest payments on this $1 million. And this agreement is called an interest rate swap. This is where we will stop. In the next video, we will go through the whole mechanism and see that A now really pays at a fixed rate and all their payments are included in both the swap and the creditor, and company B, having entered into this agreement, will pay at a variable interest rate. Subtitles by the Amara.org community

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.

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 having 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.

(L I B O R + 1 .50%) + 8.65% − (L I B O R + 0.70%) = 9.45% (\displaystyle (LIBOR+1.50\%)+8.65\%-(LIBOR+0 .70\%)=9.45\%), 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 both streams to lead to mind 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 trade inception, the pricing of the swap is such that the swap has zero present net worth ( N P V = 0 (\displaystyle NPV=0)). 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. (Deals f i x e d − f o r − f i x e d (\displaystyle fixed-for-fixed) in one currency, as a rule, are impossible, 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 mutually 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 10 MM USD (\displaystyle (\text(10 MM USD))) in exchange for TIBOR USD 3M (\displaystyle (\text(TIBOR USD 3M))) 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 begins in the distant future relative to the date of the transaction).

Swaps F i x e d − f o r − f l o a t i n g (\displaystyle Fixed-for-floating) in 2 currencies are used for 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 + 50 bp 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 contract f i x e d − f o r − f l o a t i n g (\displaystyle fixed-for-floating) IRS in two currencies, on which it will be:

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.

JPY LIBOR 1M (\displaystyle (\text(JPY LIBOR 1M))) monthly in exchange for JPY TIBOR 1M (\displaystyle (\text(JPY TIBOR 1M))) also monthly for notional amount 1 billion yen over 3 years.

swaps are used to hedge or speculate against the 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

F l o a t i n g − f o r − f l o a t i n g (\displaystyle Floating-for-floating) 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 USD LIBOR 1M (\displaystyle (\text(USD LIBOR 1M))) quarterly in the amount of USD 10 million in exchange for JPY TIBOR 3M (\displaystyle (\text(JPY TIBOR 3M))) also monthly for 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. On top of that, 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 f l o a t i n g − f o r − f l o a t i n g (\displaystyle floating-for-floating) 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 there is a simple exchange of interest flows - for example, to hedge coupon strip transactions.

Application

Interest rate swaps are used in a variety of investment strategies. They are a popular tool for hedging and financial speculation.

Hedging

Fixing an interest rate under a swap agreement allows you to hedge against falling interest rates.

Speculation

Due to the low entry threshold for interest rate swaps, they are popular with traders who speculate on interest rate movements.

So, instead of opening a full-fledged short position on the underlying asset, for which the price is expected to fall, it is enough for a trader to enter into a swap agreement that fixes the interest rate for the same period.

Pricing

More information en:wiki Rational pricing

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.

P V fixed = C × ∑ i = 1 M (P × t i T i × d f i) (\displaystyle PV_(\text(fixed))=C\times \sum _(i=1)^(M)(P\times (\frac (t_(i))(T_(i)))\times df_(i))) where C (\displaystyle C)- swap rate M (\displaystyle M)- number of periods of fixed interest payments, P (\displaystyle P) t i (\displaystyle t_(i)) i (\displaystyle i), T i (\displaystyle T_(i)) d f i (\displaystyle df_(i))- discount factor.

The value of the floating leg of the swap is also calculated based on the current value of the floating interest payments determined at the time of the trade. However, at the beginning of the swap, only the future interest payments on the fixed leg are known, while the forward interest rates are used to approximate the floating leg interest rates.

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:

P V float = ∑ j = 1 N (P × f j × t j T j × d f j) (\displaystyle PV_(\text(float))=\sum _(j=1)^(N)(P\times f_(j )\times (\frac (t_(j))(T_(j)))\times df_(j))) where N (\displaystyle N)- the number of floating interest payments, f j (\displaystyle f_(j))- forward interest rate, P (\displaystyle P)- the nominal amount of the transaction, t j (\displaystyle t_(j))- number of days in the percentage period j (\displaystyle j), T j (\displaystyle T_(j))- the financial base of the currency in accordance with the convention and d f j (\displaystyle df_(j))- discount factor. The discount factor always starts at 1.

The factor is calculated as follows:

d f r r e n t p e r i o d = d f p r e v i o u u u r i o d 1 + f o r d r a t e p r e v i o u r i o d × y e a r a c a o n (\ displayStyle (df_ (currentperiod) = (\ frac (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_ (df_soper) PreviousPeriod)\times YearFraction))).

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:

C = P V float ∑ i = 1 M (P × t i T i × d f i) (\displaystyle C=(\frac (PV_(\text(float)))(\sum _(i=1)^(M)( P\times (\frac (t_(i))(T_(i)))\times df_(i)))))

At the moment of conclusion of the transaction, none of the parties to the contract has advantages in terms of the value of the swap legs, that is:

P V fixed = P V float (\displaystyle PV_(\text(fixed))=PV_(\text(float)))

Thus, at the time of the conclusion of the transaction, there are no payments between the parties.

During the life of the trade, the same pricing technique is used to estimate the value of the swap, but since forward rates change over time, the present value ( P V (\displaystyle PV)) of the swap's floating leg will be different from the fixed fixed leg.

Therefore, the swap will become an obligation on one side and a claim on the other, depending on the direction in which interest rates change.

Risks

The interest rate swap position contains interest and credit risks for the parties to the contract.

An interest rate swap is the most common type of swap. It is an agreement on the exchange of interest rates.
An interest rate swap consists of exchanging a debt with a fixed interest rate for a debt with a floating rate.
The persons participating in the swap exchange only interest payments, but not face values. Payments are made in a single currency. Under the terms of the swap, the parties undertake to exchange payments over a number of years. Typically, the duration of the swap ranges from 2 to 15 years. One party pays amounts that are calculated on the basis of a fixed (fixed) interest rate on the face value fixed in the contract, and the other party pays amounts according to a floating percentage of this face value. LIBOR is often used as a floating rate in swaps.
With the help of a swap, the parties involved get the opportunity to exchange fixed-interest (fixed) obligations for obligations with a floating interest rate and vice versa.
The need to make such an exchange may arise, for example, due to the fact that a firm that has issued a fixed interest obligation expects interest rates to fall in the future. Therefore, as a result of the exchange of a fixed interest rate for a floating one, the firm will be able to relieve itself of part of the financial burden of debt servicing. On the other hand, a company that has issued a floating rate bond and expects interest rates to rise in the future may avoid increasing its debt service payments by swapping the floating rate for a fixed rate.
Since different participants in economic relations assess the future conjuncture differently, there will also be opportunities for such exchanges. At the same time, the attractiveness of an interest rate swap lies not only or not so much in the ability to insure against adverse changes in future interest rates, but in the ability to issue debt at a lower interest rate.

The simplest explanations of the nature of the swap
An example of a simple swap. Consider a hypothetical interest rate swap entered into on July 10, 2008 between companies A and B. Company A believes that interest rates will rise over the next three years, and company B that they will fall. Suppose Company A agreed to pay Company B an interest rate of 5% per annum on the principal amount of $100 million. In return, Company B agreed to pay Company A six-month LIBOR at the same principal rate.
Let's say that the companies exchange payments every six months (for three years), while the 5% rate is charged every six months.

The first exchange of payments took place on January 10, 2009, that is, six months after the conclusion of the agreement. Company A must pay $2.5 million to Company B. In turn, Company B must pay Company A interest income, accrued for $100 million at the six-month LIBOR rate established on 07/10/2008. Let six-month LIBOR then equal 4.2% per annum. That is: 0.5? 4.2? 100 = $2.1 million. Note that the amounts of the first exchange are known in advance.
The second exchange should take place on 10.07.2009. Company A is known to pay Company B $2.5 million again. On January 10, 2009, the fixed six-month LIBOR rate is 4.8%. So Company B will pay Company A $2.4 million.
Table 1 lists all payments and receipts under the three-year swap for company A, which supposedly have already taken place.

Table 1. Payments and receipts under a three-year swap of company A

the date	Six-month LIBOR (%)	Cash received under LIBOR	Amounts of money paid at a fixed rate	Difference
10.07.2008	4,20
10.01.2009	4,80	+2,10	-2,50	-0,40
10.07.2009	5,30	+2,40	-2,50	-0,10
10.01.2010	5,50	+2,65	-2,50	+0,15
10.07.2010	5,60	+2,75	-2,50	+0,25
10.01.2011	5,90	+2,80	-2,50	+0,30
10.07.2011		+2,95	-2,50	+0,45

We see that company A entered into a profitable swap for itself, since the difference in payments and receipts turned out to be in its favor. The LIBOR rate had a steady upward trend over a three-year period.

Using a swap to convert liabilities
An example of converting liabilities. Let Company A borrow $100 million at LIBOR pole 10 basis points (ie LIBOR + 0.1%). Analysts of company A came to the conclusion that the LIBOR rate will increase in the next three years.

In such a case, Company A could swap its floating interest debt for fixed interest debt. And she finds a second participant for the swap, company B, which has borrowed at 5.2% fixed. The participants in the swap agreed among themselves that company A would pay a fixed percentage of 5% per annum to company B twice a year, and company B would pay six-month LIBOR to company A every six months (see Fig. 2.). If LIBOR actually increases over the next three years, Company A will be able to reduce its payments. But if LIBOR falls, what does Company B win?

Applying a swap to transform assets
An example of asset conversion. Let's consider the opposite situation. Let company A have bonds worth $100 million, which will bring her 4.7% per annum. Company B, on the other hand, has bonds that earn it a fixed LIBOR interest rate of 0.2 LIBOR. Companies A and B can transform their assets using a swap, say, according to this scheme (Fig. 3). In this case, increase will go to the benefit of company A, and vice versa.


Role of financial intermediaries
As a rule, many companies, especially non-financial ones, do not directly enter into swap negotiations. Each of them communicates with a financial intermediary who enters into transactions with companies regarding swaps (brings companies into a swap) and receives three or four basis points for his services (ie 0.03 or 0.04%). In this case, the transaction shown in Fig. 2 is converted into the trade shown in Fig. four.

In this case, the financial intermediary earns a profit of 0.03% accrued in the amount of $100 million.
The opportunity to realize comparative advantage is present in the market. For example, it is easier for banks to issue obligations with a fixed interest rate, and for companies - with a floating one. As a result of the exchange of these obligations, the costs of the parties associated with entering the relevant markets are reduced, and the profitability of their operations is increased.
Another common type of swap is the currency swap.
A currency swap is an exchange of par and fixed interest in one currency for par and fixed interest in another currency.
Sometimes real exchange denomination may or may not occur. The implementation of a currency swap can be due to various reasons:
? currency restrictions on currency conversion;
? the desire to eliminate currency risks;
? the desire to issue bonds in the currency of another country in conditions where a foreign issuer is little known in this country, and therefore the market for this currency is directly inaccessible to him.