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Multinational Financial Management Alan Shapiro 7 th Edition J.Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. SWAPS AND INTEREST RATE DERIVATIVES. CHAPTER 9. CHAPTER OVERVIEW. I. Interest Rate and Currency Swaps
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
I. Interest Rate and Currency Swaps
II. Interest Rate Forwards and Futures
III. Structured Notes
I. INTEREST RATE AND CURRENCY SWAPS
A. INTEREST RATE SWAPS
an agreement between 2 parties to
exchange US$ interest payments
for a specific maturity on an agreed notional amount.
a. Notional principal: a reference amount used only to calculate interest expense but never repaid.
b. Maturities: less than 1 to over 15 years
a. Coupon swap
b. Basis swap
3. LIBOR: the most important reference rate in a swap
4. Swap Usage:
to reduce risk potential and costs.
B. Currency Swaps
two parties exchange foreign currency-
denominated debt at periodic intervals.
2. Purpose: similar to parallel loan
3. Differences of a Currency Swap:
a. Currency swap is not a loan
b. No interest expense; no balance sheet entry
c. The right to offset any non- payment is more firmly established
4. Similarities between Interest Rate and
a. Avoid exchange rate risk
b. Exchange rate is only a reference to
determine amounts exchanged
5. Economic Benefits of Swaps
when arbitrage prohibited, they provide
Forward and futures contracts:
- three types used to manage interest rate risk
A. Forward forwards
B. Forward rate agreements
C. Eurodollar futures
1. a contract that fixes an interest rate today on a future loan or deposit.
2. Contract conditions:
- specific interest rate
- principal amount of future loan
- start and ending dates of future
interest rate period
Forward rate agreements (FRAs)
2. over-the-counter forward contract 3. company fixes an interest rate
applied to a specified future interest period on a notional amount.
1. A cash-settled futures contract for
a 3-month eurodollar deposit
2. Contracts traded on:
a. Chicago Mercantile Exchange
b. London International Financial Futures Exchange
c. Singapore International Monetary Exchange
Interest-bearing securities whose interest payments are determined by reference to a formula set in advance and adjusted on specific reset dates.
a floating-rate instrument whose interest rate moves inversely with market interest rates.