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Seminar: Timely Topics for Today’s Business World

Seminar: Timely Topics for Today’s Business World. Mr. Bernstein Swaps J anuary 2013. Seminar: Timely Topics for Today’s Business World Mr. Bernstein. Fixed-to- Floating Rate Firm A borrows at a f loating rate. They enter a s wap with Firm B to pay a s et interest rate and receive

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Seminar: Timely Topics for Today’s Business World

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  1. Seminar: Timely Topics for Today’s Business World Mr. Bernstein Swaps January 2013

  2. Seminar: Timely Topics for Today’s Business WorldMr. Bernstein Fixed-to- Floating Rate Firm A borrows at a floating rate. They enter a swap with Firm B to pay a set interest rate and receive a floating rate, converting their interest rate risk into a known price level.

  3. Seminar: Timely Topics for Today’s Business WorldMr. Bernstein Fixed-to- Floating Rate • Firm A pays 3% and receives Libor + .5%. • Firm B pays Libor +.5% and receives 6%. • At the end of period 1, Libor = 1.5%. Firm A pays Firm B 1.5%. This will continue for 10 years. • If Libor rises above 3%, Firm B will pay Firm A. • Spreads are determined each day in the marketplace.

  4. Seminar: Timely Topics for Today’s Business WorldMr. Bernstein Equity Index Swap Also useful to gain exposure to many restricted markets

  5. Seminar: Timely Topics for Today’s Business WorldMr. Bernstein CDS Credit Default Swap Creates a Synthetic Bond Allows leverage Investor gets returns even if bond is not available

  6. Seminar: Timely Topics for Today’s Business WorldMr. Bernstein Swaps are executed OTC (Over the Counter) ISDA = International Swap Dealers Ass’n Industry standard template with custom terms negotiated OTC derivatives contain credit risk vs. counterparties

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