Interest Rate Swap

Interest Rate Swap Overview
Interest rate swap is kind of derivative. An interest rate swap involves the exchange of cash flows with interest payments between two parties. The interest rate swaps have higher levels of liquidity and hence are favored by the investors.
Types of Interest Rate Swap
There are several types of interest rate swaps. The various kinds of interest rate swaps include the following:

  • Fixed-for-Fixed
  • Floating-for-Floating
  • Fixed-for-Floating

According to the theory of interest rate swap, a fixed-for-fixed rate swap in a single currency is not possible. The fixed-for-floating rate swap has two different versions:

  • Fixed-for-Floating Rate Swap in Different Currencies
  • Fixed-for-Floating Rate Swap in the Same Currency

The Floating-for-Floating Rate Swap is available in the following denominations:

  • Floating-for-Floating Rate Swap in Same Currency and Different Index
  • Floating-for-Floating Rate Swap in Different Currencies

The Fixed-for-Fixed Rate Swap is normally available in different currencies.
Uses of Interest Rate Swaps
Interest rate swaps are normally used in the following activities:

  • Hedging
  • Valuation and Pricing
  • Speculation

The hedgers use the interest rate swap to govern the liabilities as well as the free or floating assets. The speculators can make profits from the interest rate swaps by virtue of the changes in rates of interest when they substitute the bond exposures that have not been funded.
Market Size of Interest Rate Swaps
According to the Bank for International Settlements the interest rate swaps make up the biggest portion of the Over-the-Counter derivatives market of the world. The speculative outstanding amount of the interest rate swaps was $ 229.8 trillion on December 2006. This amount was $ 60.7 trillion or 35.9% more than the amount calculated on December 2005.

The value of the global OTC derivative market is $415 trillion. The interest swap market contracts make up 55.4% of the over-the-counter derivative market of the world.

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Last Updated on : 1st July 2013

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