《International Financial Management》课程教学课件（PPT讲稿）Chapter 11 Interest Rate and Currency Swaps

Interest RateandCurrency SwapsChapter Eleven

Chapter OutlineTypes of SwapsSize of the Swap MarketSwap Market QuotationsInterest Rate SwapsCurrencySwapsRisks of Interest Rate and Currency Swaps

Chapter Outline ❖Types of Swaps ❖Size of the Swap Market ❖Swap Market Quotations ❖Interest Rate Swaps ❖Currency Swaps ❖Risks of Interest Rate and Currency Swaps

DefinitionsIn a swap, two counterparties agree to acontractual arrangement wherein theyagree to exchange cash flows at periodicintervals.Reading: P338 "The world bank's firstcurrency swap

Definitions ❖In a swap, two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals. ❖Reading: P338 “The world bank’s first currency swap

There are two types of interest rate swaps:Single currency interest rate swap."Plain vanilla" fixed-for-floating swaps are oftenjust called interest rate swaps. Cross-Currency interest rate swap? This is often called a currency swap; fixed for fixedrate debt service in two (or more) currencies

❖There are two types of interest rate swaps: ▪ Single currency interest rate swap •“Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps. ▪ Cross-Currency interest rate swap •This is often called a currency swap; fixed for fixed rate debt service in two (or more) currencies

Size of the Swap MarketIn 2009 the notational principal of:Interest rate swaps was $349.2 trillion USD Currency swaps was $16.5 trillion USD.The most popular currencies are: U.S. dollarJapanese yenEuroSwiss francBritish pound sterling

Size of the Swap Market ❖In 2009 the notational principal of: ▪ Interest rate swaps was $349.2 trillion USD. ▪ Currency swaps was $16.5 trillion USD. ❖The most popular currencies are: ▪ U.S. dollar ▪ Japanese yen ▪ Euro ▪ Swiss franc ▪ British pound sterling

TheSwapBankA swap bank is a generic term to describe afinancial institution that facilitates swapsbetween counterparties.The swap bank can serve as either a broker or adealer. As a broker, the swap bank matches counterpartiesbut does not assume any of the risks of the swap As a dealer, the swap bank stands ready to accepteither side of a currency swap, and then later lay offtheir risk, or match it with a counterparty

The Swap Bank ❖A swap bank is a generic term to describe a financial institution that facilitates swaps between counterparties. ❖The swap bank can serve as either a broker or a dealer. ▪ As a broker, the swap bank matches counterparties but does not assume any of the risks of the swap. ▪ As a dealer, the swap bank stands ready to accept either side of a currency swap, and then later lay off their risk, or match it with a counterparty

Swap Market QuotationsSwap banks will tailor the terms ofinterest rate and currency swaps tocustomers' needsThey also make a market in “plainvanilla" swaps and provide quotes forthese. Since the swap banks are dealers forthese swaps, there is a bid-ask spread

Swap Market Quotations ❖Swap banks will tailor the terms of interest rate and currency swaps to customers’ needs. ❖They also make a market in “plain vanilla” swaps and provide quotes for these. Since the swap banks are dealers for these swaps, there is a bid-ask spread

Interest Rate Swap QuotationsThe convention is to quote against U.S. dollar LIBORU.S. $Euro-Ef SterlingSwiss francBidAskBidBidAskBidAskAsk5.215.220.922.342.370.983.543.571 year5.181.231.313.903.942.622.655.142 year2.862.893 year3.82-3.85 means the swap bank will3.064 year3.09pay fixed-rate euro payments at 3.82%3.235 year3.26against receiving euro LIBOR or it will3.383.41receive fixed-rate euro payments at6 year3.85% against receiving euro LIBOR3.523.557 year3.663.635.105.152.372.454.624.668 year3.743.775.095.144.482.564.704.729 year3.823.855.085.132.562.644.754.7910 year

Interest Rate Swap Quotations Euro-€ £ Sterling Swiss franc U.S. $ Bid Ask Bid Ask Bid Ask Bid Ask 1 year 2.34 2.37 5.21 5.22 0.92 0.98 3.54 3.57 2 year 2.62 2.65 5.14 5.18 1.23 1.31 3.90 3.94 3 year 2.86 2.89 5.13 5.17 1.50 1.58 4.11 4.13 4 year 3.06 3.09 5.12 5.17 1.73 1.81 4.25 4.28 5 year 3.23 3.26 5.11 5.16 1.93 2.01 4.37 4.39 6 year 3.38 3.41 5.11 5.16 2.10 2.18 4.46 4.50 7 year 3.52 3.55 5.10 5.15 2.25 2.33 4.55 4.58 8 year 3.63 3.66 5.10 5.15 2.37 2.45 4.62 4.66 9 year 3.74 3.77 5.09 5.14 4.48 2.56 4.70 4.72 10 year 3.82 3.85 5.08 5.13 2.56 2.64 4.75 4.79 3.82–3.85 means the swap bank will pay fixed-rate euro payments at 3.82% against receiving euro LIBOR or it will receive fixed-rate euro payments at 3.85% against receiving euro LIBOR. The convention is to quote against U.S. dollar LIBOR

SwapQuotations3.82-3.85 means the swap bank will pay fixed-rateeuro payments at 3.82% against receiving dollarLIBOR or it will receive fixed-rate euro payments at3.85% against paying dollar LIBOR.FirmSwap3.85%3.82%FirmBABank$LIBOR$LIBORWhile most swaps are quoted against "flat" dollarLIBOR, "off-market" swaps are available where oneparty pays LIBOR plus or minus some number

Swap Quotations 3.82–3.85 means the swap bank will pay fixed-rate euro payments at 3.82% against receiving dollar LIBOR or it will receive fixed-rate euro payments at 3.85% against paying dollar LIBOR. Swap Bank Firm A Firm B €3.85% €3.82% $LIBOR $LIBOR While most swaps are quoted against “flat” dollar LIBOR, “off-market” swaps are available where one party pays LIBOR plus or minus some number

AnExample of an Interest RateSwap*Consider this example of a “plain vanilla"interest rate swapBank A is a AAA-rated international banklocated in the U.K. who wishes to raise$10,000,000 to finance floating-rate Eurodollarloans.Bank A is considering issuing 5-year fixed-rateEurodollar bonds at iO percent. It would make more sense for the bank to issuefloating-rate notes at LIBOR to finance floating-rateEurodollar loans

An Example of an Interest Rate Swap ❖Consider this example of a “plain vanilla” interest rate swap. ❖Bank A is a AAA-rated international bank located in the U.K. who wishes to raise $10,000,000 to finance floating-rate Eurodollar loans. ▪ Bank A is considering issuing 5-year fixed-rate Eurodollar bonds at 10 percent. ▪ It would make more sense for the bank to issue floating-rate notes at LIBOR to finance floating-rate Eurodollar loans