A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price, or commodity price.
Conceptually, one may view a swap as either a portfolio of forward contracts or as a long position in one bond coupled with a short position in another bond. This article will discuss the two most common and most basic types of swaps: interest rate and currency swaps.
·In finance, a swap is a derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another.
·Of the two cash flows, one value is fixed and one is variable and based on an index price, interest rate, or currency exchange rate.
·Swaps are customized contracts traded in the over-the-counter (OTC) market privately, versus options and futures traded on a public exchange.
·The plain vanilla interest rate and currency swaps are the two most common and basic types of swaps.
The Swaps Market
Unlike most standardized options and futures contracts, swaps are not exchange-traded instruments. Instead, swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties. Firms and financial institutions dominate the swaps market, with few (if any) individuals ever participating. Because swaps occur on the OTC market, there is always the risk of a counterparty defaulting on the swap.
The first interest rate swap occurred between IBM and the World Bank in 1981. However, despite their relative youth, swaps have exploded in popularity. In 1987, the International Swaps and Derivatives Association reported that the swaps market had a total notional value of $865.6 billion. By mid-2006, this figure exceeded $250 trillion, according to the Bank for International Settlements. Thats more than 15 times the size of the U.S. public equities market.
Plain Vanilla Interest Rate Swap
The most common and simplest swap is a plain vanilla interest rate swap. In this swap, Party A agrees to pay Party B a predetermined, fixed rate of interest on a notional principal on specific dates for a specified period of time. Concurrently, Party B agrees to make payments based on a floating interest rate to Party A on that same notional principal on the same specified dates for the same specified time period. In a plain vanilla swap, the two cash flows are paid in the same currency. The specified payment dates are called settlement dates, and the times between are called settlement periods. Because swaps are customized contracts, interest payments may be made annually, quarterly, monthly, or at any other interval determined by the parties.
For example, on Dec. 31, 2006, Company A and Company B enter into a five-year swap with the following terms:
·Company A pays Company B an amount equal to 6% per annum on a notional principal of $20 million.
·Company B pays Company A an amount equal to one-year LIBOR + 1% per annum on a notional principal of $20 million.
For simplicity, lets assume the two parties exchange payments annually on December 31, beginning in 2007 and concluding in 2011.
At the end of 2007, Company A will pay Company B $1,200,000 ($20,000,000 * 6%). On Dec. 31, 2006, one-year LIBOR was 5.33%; therefore, Company B will pay Company A $1,266,000 ($20,000,000 * (5.33% + 1%)). In a plain vanilla interest rate swap, the floating rate is usually determined at the beginning of the settlement period. Normally, swap contracts allow for payments to be netted against each other to avoid unnecessary payments. Here, Company B pays $66,000, and Company A pays nothing. At no point does the principal change hands, which is why it is referred to as a “notional” amount. Figure 1 shows the cash flows between the parties, which occur annually (in this example).
2007年底，甲公司将向乙公司支付120万美元(2000万美元* 6%)。2006年12月31日，一年期伦敦银行同业拆放利率为5.33%；因此，乙公司将向甲公司支付1,266,000美元(20，000，000 * (5.33% + 1%))。在普通的利率掉期中，浮动利率通常在结算期开始时确定。通常，掉期合约允许付款相互抵消，以避免不必要的付款。在这里，乙公司支付66,000美元，甲公司不支付任何费用。本金在任何时候都不会转手，这就是为什么它被称为“名义”金额。下图显示了双方之间每年都会发生的现金流(在本例中)。
Plain Vanilla Foreign Currency Swap
The plain vanilla currency swap involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap. The two specified principal amounts are set so as to be approximately equal to one another, given the exchange rate at the time the swap is initiated.
For example, Company C, a U.S. firm, and Company D, a European firm, enter into a five-year currency swap for $50 million. Lets assume the exchange rate at the time is $1.25 per euro (e.g., the dollar is worth 0.80 euro). First, the firms will exchange principals. So, Company C pays $50 million, and Company D pays 40 million euros. This satisfies each companys need for funds denominated in another currency (which is the reason for the swap).
As with interest rate swaps, the parties will actually net the payments against each other at the then-prevailing exchange rate. If at the one-year mark, the exchange rate is $1.40 per euro, then Company Cs payment equals $1,400,000, and Company Ds payment would be $4,125,000. In practice, Company D would pay the net difference of $2,725,000 ($4,125,000 – $1,400,000) to Company C. Then, at intervals specified in the swap agreement, the parties will exchange interest payments on their respective principal amounts.
To keep things simple, lets say they make these payments annually, beginning one year from the exchange of principal. Because Company C has borrowed euros, it must pay interest in euros based on a euro interest rate. Likewise, Company D, which borrowed dollars, will pay interest in dollars, based on a dollar interest rate. For this example, lets say the agreed-upon dollar-denominated interest rate is 8.25%, and the euro-denominated interest rate is 3.5%. Thus, each year, Company C pays 1,400,000 euros (40,000,000 euros * 3.5%) to Company D. Company D will pay Company C $4,125,000 ($50,000,000 * 8.25%).
简单来讲，假设他们每年支付这些款项，从本金交换的第一年开始。因为丙公司借入了欧元，所以必须按照欧元利率以欧元支付利息。同样，借入美元的丁公司将根据美元利率支付美元利息。对于这个例子，假设约定的美元计价利率为8.25%，欧元计价利率为3.5%。因此，丙公司每年向丁公司支付1，400，000欧元(40，000，000欧元* 3.5%)，公司D将向公司C支付4，125，000美元(50，000，000欧元* 8.25%)。
Finally, at the end of the swap (usually also the date of the final interest payment), the parties re-exchange the original principal amounts. These principal payments are unaffected by exchange rates at the time.
Who Would Use a Swap?
The motivations for using swap contracts fall into two basic categories: commercial needs and comparative advantage. The normal business operations of some firms lead to certain types of interest rate or currency exposures that swaps can alleviate. For example, consider a bank, which pays a floating rate of interest on deposits (e.g., liabilities) and earns a fixed rate of interest on loans (e.g., assets). This mismatch between assets and liabilities can cause tremendous difficulties. The bank could use a fixed-pay swap (pay a fixed rate and receive a floating rate) to convert its fixed-rate assets into floating-rate assets, which would match up well with its floating-rate liabilities.
Some companies have a comparative advantage in acquiring certain types of financing. However, this comparative advantage may not be for the type of financing desired. In this case, the company may acquire the financing for which it has a comparative advantage, then use a swap to convert it to the desired type of financing.
For example, consider a well-known U.S. firm that wants to expand its operations into Europe, where it is less known. It will likely receive more favorable financing terms in the U.S. By using a currency swap, the firm ends up with the euros it needs to fund its expansion.