Swaps
Swaps are private agreements between two companies to exchange casflows in the future according to a prearranged formula.
So this can be regarded as portfolios of forward contracts.
Types of swaps:
1: Interest rate Swaps
2: Currency Swaps.
1. Interest rate Swaps: The most common type of interest rate swap is ‘Plain Venilla ‘.
Normal life of swap is 2 to 15 Years.
It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments.
2. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage.
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