Multinational Financial Management（跨国公司财务管理）ch09 Interest Rate Derivatives and Swaps.pptVIP

Chapter 9 Interest Rate Derivatives and Swaps INTEREST RATE AND CURRENCY SWAPS I. INTEREST RATE AND CURRENCY SWAPS A. INTEREST RATE SWAPS 1. Definition an agreement between 2 parties to exchange US$ interest payments for a specific maturity on an agreed notional amount. HOW THE CLASSIC SWAP WORKS a. Notional principal: a reference amount used only to calculate interest expense but never repaid. b. Maturities: less than 1 to over 15 years THE CLASSIC SWAP 2. Types 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. THE CURRENCY SWAP B. Currency Swaps 1. Definition two parties exchange foreign currency- denominated debt at periodic intervals. 2. Purpose: similar to parallel loan THE CURRENCY SWAP 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 THE CURRENCY SWAP 4. Similarities between Interest Rate and Currency Swaps 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 long-term financing. II. INTEREST RATE FORWARDS AND FUTURES Forward and futures contracts: - three types used to manage interest rate risk A. Forward forwards B. Forward rate agreements C. Eurodollar futures INTEREST RATE FORWARDS AND FUTURES Forward forwards 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 INTEREST RATE FORWARDS AND FUTURES Forward rate agreements (FRAs) 1. cash-settled 2. over-the-counter forward contract 3. company fixes an interest rate applied to a s