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Ppt for Forward and Swap

The document explains the differences between forward contracts and swaps, both of which are derivative instruments used for hedging against financial risks. Forward contracts involve a single future payment for buying or selling an asset, while swaps involve multiple cash flow exchanges based on financial metrics. It also covers examples, case studies, and key topics in international finance and trade related to these instruments.

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5 views

Ppt for Forward and Swap

The document explains the differences between forward contracts and swaps, both of which are derivative instruments used for hedging against financial risks. Forward contracts involve a single future payment for buying or selling an asset, while swaps involve multiple cash flow exchanges based on financial metrics. It also covers examples, case studies, and key topics in international finance and trade related to these instruments.

Uploaded by

jayeshrushisybms
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Title: "Difference Between

Forward Contracts and


Swaps" Subtitle:
Understanding Key Derivative
Instruments
"Difference Between Forward Contracts and Swaps"

What are Forwards?


•Definition: A forward contract is a customized
agreement to buy or sell an asset at a specified
price on a future date.
•Key Features:
• Customized contracts.
• Used for hedging purposes.
• Single future payment or delivery.
What are Swaps?
•Definition: A swap is an agreement between two parties to
exchange cash flows based on financial metrics (e.g., interest
rates or currencies).
•Key Features:
• Multiple cash flow exchanges over time.
• Tailored agreements.
• Used for hedging or speculation.
Examples of Forwards
1.Foreign Exchange Forward Contract:
1. A company importing goods from another country
enters into a forward contract to lock in the exchange
rate for a future payment in foreign currency.
2. This protects the company from unfavorable currency
fluctuations.
2.Commodity Forward Contract:
1. A farmer agrees to sell a specific quantity of wheat to a
buyer at a fixed price on a future date.
2. This helps the farmer hedge against falling wheat
prices, while the buyer hedges against price increases.
Examples of Swaps
1.Interest Rate Swap:
1. A company with a floating interest rate loan swaps it
with another company that has a fixed interest rate
loan.
2. This allows each company to better match its cash flow
needs or reduce exposure to interest rate volatility.
2.Currency Swap:
1. Two multinational corporations operating in different
countries exchange loan principal and interest
payments in different currencies.
2. This can help each company hedge against currency
risks or gain access to cheaper financing in the desired
currency.
Case Studies
Case Study: Risk Management with Interest Rate Swaps
A U.S.-based utility company entered into an interest rate swap
with a bank to convert its $500 million floating-rate debt into a
fixed rate. The swap ensured that the company’s interest
payments remained predictable despite fluctuations in market
interest rates, allowing better long-term financial planning.
Case Study: Commodity Forward Contract in Oil Trading
An airline company locked in the price of jet fuel by entering
into a forward contract with an oil supplier. This protected the
airline from the risk of rising fuel prices, ensuring stable
operational costs.
What is International Finance?
International finance deals with the financial interactions
between countries, focusing on areas such as:
•Exchange Rates: Managing currency fluctuations in
global markets.
•Foreign Direct Investment (FDI): Companies investing
in assets or businesses in other countries.
•Balance of Payments: A record of all economic
transactions between a country and the rest of the world.
•Global Financial Institutions: Institutions like the
International Monetary Fund (IMF) and World Bank that
promote global financial stability.
What is International Trade?
International trade involves the exchange of goods and
services across borders, driven by:
•Comparative Advantage: Countries specialize in
producing goods where they have an efficiency edge.
•Trade Agreements: Agreements like NAFTA or WTO
rules that reduce trade barriers.
•Export and Import: The selling and buying of
goods/services between nations.
•Global Supply Chains: Complex networks of
production and distribution across countries.
Key Topics in International Finance and Trade
1.Trade Policies and Tariffs: Governments set
trade rules, which can influence economic
relations.
2.Multinational Corporations (MNCs):
Companies with operations spanning multiple
countries.
3.Foreign Exchange Markets: Markets for
trading currencies.
4.Globalization: The increasing
interconnectedness of economies and cultures.
Feature Forwards Swaps

Payment Structure Single future payment/delivery Multiple cash flow exchanges


Key Difference: Forwards vs. Swaps

Hedging/speculation, financial
Purpose Hedging, customized contracts
metrics
Forwards and swaps are both types of derivatives that help
organizations and individuals to hedge against risks. Hedging
against financial loss is important in volatile market places, and
forwards and swaps provide the buyer of such instruments the
ability to guard against risk of making losses. Another similarity
between swaps and forwards is that both are not traded on
organized exchanges. The major difference between these two
derivatives is that swaps result in a number of payments in the
future, whereas the forward contract will result in one future
payment.

• Derivatives are special financial instruments that derive their


value from one or more underlying assets. Forwards and swaps
are both types of derivatives that help organizations and
individuals hedge against risks.

• A forward contract is a contract that promises delivery of the


underlying asset, at a specified future date of delivery, at an
agreed upon price stated in the contract.

• A swap is a contract made between two parties that agree to


swap cash flows on a date set in the future.

• The major difference between these two derivatives is that

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