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Institute For Technology & Management

An interest rate swap agreement was presented as an example. In the example, Company X had taken a $10 million floating rate loan indexed to LIBOR. To offset its exposure to rising interest rates, Company X entered into a swap agreement with a swap dealer. Through the swap, Company X agreed to pay a fixed interest rate of 6.25% on the $10 million notional amount, while receiving payments based on the floating LIBOR rate from the swap dealer. This allowed Company X to effectively convert its floating rate loan into a fixed rate loan, stabilizing its interest payments. The net cash flow consequences for Company X under different LIBOR rates were shown, demonstrating how the swap offsets Company X's exposure to fluctuating

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60 views

Institute For Technology & Management

An interest rate swap agreement was presented as an example. In the example, Company X had taken a $10 million floating rate loan indexed to LIBOR. To offset its exposure to rising interest rates, Company X entered into a swap agreement with a swap dealer. Through the swap, Company X agreed to pay a fixed interest rate of 6.25% on the $10 million notional amount, while receiving payments based on the floating LIBOR rate from the swap dealer. This allowed Company X to effectively convert its floating rate loan into a fixed rate loan, stabilizing its interest payments. The net cash flow consequences for Company X under different LIBOR rates were shown, demonstrating how the swap offsets Company X's exposure to fluctuating

Uploaded by

sneha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INSTITUTE FOR TECHNOLOGY & MANAGEMENT

PRESENTED TO PROF. KASHYAP

ATUL VAGAL VISHAL KATARIA ADITYA JAMBHEKAR PRAFUL AMBRE ANKITA SHAH SNEHA PATEL ROMIT SHAH

04 07 08 11 24 43 64

A Swap is an agreement between two parties to Exchange Cash Flows based on underlying asset.

Using Swaps Manage risks Arbitrage Enter new markets Create new instruments

In ancient medieval period there was no currency or money. So people use to exchange things Today, swaps are among the most heavily traded financial contracts in the world Most swaps are traded over-the-counter

Benefits
Customizable due to over-the-counter nature of the product No regulatory issues Low cost

Disadvantages
Significant cash flows can result in distress sale Termination date and rolling over cost Cost due to customization Credit Risk

Interest rate swaps Circus swaps Credit default swaps Equity swaps Commodity swaps Equity default swaps Swapation

Suppose company x in USA has borrowed $10 million floating-rate loan for 5 years which is indexed to LIBOR. The interest amount each year will be: LIBOR RATE X $10 million.

Suppose LIBOR rate is either 5.75% , 6.25% or 6.75%. The companys floating-rate interest payments will be:
LIBOR Rate 5.75% Floating-rate loan interest (LIBOR rate x $10 million ) 5,75,000 6.25% 6,25,000 6.75% 6,75,000

Suppose company x expected to have a steady flow of revenue from its investment. The company, instead of a floating-rate loan, could have taken fiveyear fixed-rate loan to finance the capital expenditure.

The company can swap the fixed-rate loan for the floating-rate loan. It would pay fixed payments for payments indexed to floating interest rate. If the interests rise, it will increase the companys interest amount on the floating-rate loan but, under swap, its receipts will also increase. Thus, swap will offset the companys exposure.

PAYS 6.25% ON NOTIONAL AMOUNT OF 10$ MILLION

COMPANY X

SWAP DEALER

RECEIVE PAYMENT FOR THE LIBOR RATE ON THE SAME AMOUNT

LIBOR RATE
5.75% Swap cash payment (LIBOR rate x $10 million) Swap cash receipts (0.0625 x $10 million) Net cash flow on swap 5.75% 6.25% 6.25% 6.75% 6.75%

6,25,000

6,25,000

6,25,000

+50,000

-50,000

The net cash flow consequences of swap agreement and the floating-rate loan for the company under the three different LIBOR rates will be shown bellow:
LIBOR RATE

5.75%
Floating-rate loan interest payment (LIBOR rate x $10 million ) + Net cash flow on swap [(0.0625-LIBOR)] Net payment 5,75,000

6.25%
6,25,000

6.75%
6,75,000

50,000 6,25,000

6,25,000

-50,000 6,25,000

CONCLUSION

THANK YOU

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