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1、,INTERNATIONALFINANCIALMANAGEMENT,EUN / RESNICK,Second Edition,10,Chapter Ten,Currency & Interest Rate Swaps,Chapter Objective:This chapter discusses currency and interest rate swaps, which are relatively new instruments for hedging long-term interest rate risk and foreign exchange risk.,McGraw-Hill
2、/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-1,Chapter Outline,Types of SwapsSize of the Swap MarketThe Swap BankInterest Rate SwapsCurrency Swaps,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-2,Chapter Outline (contin
3、ued),Swap Market QuotationsVariations of Basic Currency and Interest Rate SwapsRisks of Interest Rate and Currency SwapsSwap Market EfficiencyConcluding Points About Swaps,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-3,Definitions,In a swap, two counter
4、parties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals.There are two types of interest rate swaps:Single currency interest rate swap“Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps.Cross-Currency interest rate swap
5、This is often called a currency swap; fixed for fixed rate debt service in two (or more) currencies.,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-4,Size of the Swap Market,In 1995 the notational principal of:interest rate swaps was $12,810,736,000,000.C
6、urrency swaps $1,197,395,000,000The most popular currencies are:U.S.$ (34%) (23%)DM (11%)FF (10%) (6%),McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-5,The Swap Bank,A swap bank is a generic term to describe a financial institution that facilitates swaps
7、between counterparties.The swap bank can serve as either a broker or a dealer.As a broker, the swap bank matches counterparties but does not assume any of the risks of the swap.As a dealer, the swap bank stands ready to accept either side of a currency swap, and then later lay off their risk, or mat
8、ch it with a counterparty.,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-6,An Example of an Interest Rate Swap,Consider this example of a “plain vanilla” interest rate swap.Bank A is a AAA-rated international bank located in the U.K. who wishes to raise
9、$10,000,000 to finance floating-rate Eurodollar loans.Bank A is considering issuing 5-year fixed-rate Eurodollar bonds at 10 percent.It would make more sense to for the bank to issue floating-rate notes at LIBOR to finance floating-rate Eurodollar loans.,McGraw-Hill/Irwin Copyright 2001 by The McGra
10、w-Hill Companies, Inc. All rights reserved.,10-7,An Example of an Interest Rate Swap,Firm B is a BBB-rated U.S. company. It needs $10,000,000 to finance an investment with a five-year economic life.Firm B is considering issuing 5-year fixed-rate Eurodollar bonds at 11.75 percent.Alternatively, firm
11、B can raise the money by issuing 5-year FRNs at LIBOR + percent.Firm B would prefer to borrow at a fixed rate.,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-8,An Example of an Interest Rate Swap,The borrowing opportunities of the two firms are shown in t
12、he following table:,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-9,10 3/8%,LIBOR 1/8%,An Example of an Interest Rate Swap,Bank A,Swap Bank,The swap bank makes this offer to Bank A: You pay LIBOR 1/8 % per year on $10 million for 5 years and we will pay
13、you 10 3/8% on $10 million for 5 years,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-10,10 3/8%,LIBOR 1/8%,An Example of an Interest Rate Swap,Bank A,Swap Bank,Heres whats in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing
14、 position of -10 3/8 + 10 + (LIBOR 1/8) =LIBOR % which is % better than they can borrow floating without a swap.,10%, % of $10,000,000 = $50,000. Thats quite a cost savings per year for 5 years.,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,10-11,LIBOR %,10
15、 %,An Example of an Interest Rate Swap,Swap Bank,Company B,The swap bank makes this offer to company B: You pay us 10 % per year on $10 million for 5 years and we will pay you LIBOR % per year on $10 million for 5 years.,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,
