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Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons

Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. Swaps and Interest Rate Derivatives. Chapter 9. INTEREST RATE AND CURRENCY SWAPS. I. INTEREST RATE AND CURRENCY SWAPS

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Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons

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  1. Multinational Financial Management Alan Shapiro9th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

  2. Swaps and Interest Rate Derivatives Chapter 9

  3. 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.

  4. HOW THE CLASSIC SWAP WORKS • A. INTEREST RATE SWAPS (con’t) • 2. Notional principal: a reference amount used only to calculate interest expense but never repaid. • 3. Maturities: less than 1 to over 15 years

  5. THE CLASSIC SWAP • 4. Types • a. Coupon swap • b. Basis swap • 5. LIBOR: the most important reference rate in a swap • 6. Swap Usage: • To reduce risk potential and costs.

  6. THE CURRENCY SWAP • B. Currency Swaps • 1. Definition • two parties exchange foreign currency- • denominated debt at periodic intervals. • 2. Purpose: similar to parallel loan

  7. 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

  8. 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.

  9. 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

  10. INTEREST RATE FORWARDS AND FUTURES • A. 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

  11. INTEREST RATE FORWARDS AND FUTURES • B. Forward rate agreements (FRAs) • 1. cash-settled • 2. over-the-counter forward contract • company fixes an interest rate applied to a specified future interest period on a notional amount.

  12. INTEREST RATE FORWARDS AND FUTURES • C. Eurodollar Futures • 1. A cash-settled futures contract for a 3- month eurodollar deposit paying LIBOR • 2. Contracts traded on: • a. Chicago Mercantile Exchange • b. London International Financial Futures Exchange • c. Singapore International Monetary Exchange

  13. STRUCTURED NOTES • A. Definition • Interest-bearing securities whose interest payments are determined by reference to a formula set in advance and adjusted on specific reset dates.

  14. STRUCTURED NOTES • B. Inverse Floaters • a floating-rate instrument whose interest rate moves inversely with market interest rates.

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