What is the difference between interest rate swap and currency swap?

What is the difference between interest rate swap and currency swap?

Interest rate swaps involve exchanging interest payments, while currency swaps involve exchanging an amount of cash in one currency for the same amount in another.

What is an asset swap curve?

An asset swap is a derivative contract between two parties that swap fixed and floating assets. The transactions are done over-the-counter. Normally, an asset swap starts with the investor acquiring a bond position. Then, the investor will swap the fixed rate of the bond with a floating rate through the bank.

What is a perfect asset swap?

A perfect asset swap is used to remove an investor’s interest rate and currency risk even if a bond defaults, whereas a cross-currency asset swap only protects investors if the asset never defaults, explained Dominic O’Kane, head of Lehman’s European quantitative credit research group in London.

Is swap an asset or liability?

A liability is like an asset swap, except that the parties are exchanging exposure to liabilities (e.g., debts) instead of assets. Liability swaps involve exchanging a fixed rate for a floating rate (or vice versa).

What is swap in investment banking?

A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything.

Why do banks use interest rate swaps?

Why would a bank offer interest rate swaps? Gives the bank flexibility – Providing another tool to help manage its interest rate risk, not only at the loan by loan level, but also at the macro or balance sheet level. Offers an economic benefit – Executing a swap will generate non-interest income for the bank.

What is ASW bond?

An asset swap (ASW) is a synthetic position that combines a fixed rate bond with a fixed-to-floating interest rate swap. 1 The bondholder effectively transforms the pay-off, where she pays the fixed rate and receives the floating rate consisting of LIBOR (or EURIBOR) plus the ASW spread.

What is par swap rate?

The value of the fixed rate which gives the swap a zero present value or the fixed rate that will make the value of the fixed leg equal to the value of the floating leg.

Is an interest rate swap an asset?

Rather than regular fixed and floating loan interest rates being swapped, fixed and floating assets are being exchanged. All swaps are derivative contracts through which two parties exchange financial instruments. As the name suggests, asset swaps involve an actual asset exchange instead of just cash flows.

What is the purpose of interest rate swaps?

Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

What are the basics of an asset swap?

Basics of an Asset Swap. Asset swaps can be used to overlay the fixed interest rates of bond coupons with floating rates. In that sense, they are used to transform cash flow characteristics of underlying assets and transforming them to hedge the asset’s risks, whether relate to currency, credit, and/or interest rates.

What is an interest rate swap and how does it work?

An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. Swaps are derivative contracts and trade over-the-counter.

How is the value of a swap calculated?

The value of the swap would be the spread that the seller pays over or under LIBOR. It is based on two things: The coupon values of the asset compared to the market rate. The accrued interest and the clean price premium or discount compared to par value. The swap shares the same maturity as the original coupon.

What is a bond swap and what is it used for?

It is widely used by banks to convert their long-term fixed rate assets to a floating rate in order to match their short-term liabilities (depositor accounts). Another use is to insure against loss due to credit risk, such as default or bankruptcy, of the bond’s issuer. Here, the swap buyer is also buying protection.