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What is the purpose of swaps?
Posted on 1/17/13 at 9:17 pm
Posted on 1/17/13 at 9:17 pm
I'm referring to the plain vanilla type of swaps where one company pays a fixed interest rate on the principle to another company who pays a floating interest rate, like LIBOR.
Is this is a situation where one party can only profit at the other party's expense? For example, one company thinks that the floating interest rate will pay them more than they have to pay at the fixed rate over the life of the contract. It's like two companies have different ideas about which rate will be higher and they profit according to who correctly forcastes the future rates. Is that the basic idea?
Is this is a situation where one party can only profit at the other party's expense? For example, one company thinks that the floating interest rate will pay them more than they have to pay at the fixed rate over the life of the contract. It's like two companies have different ideas about which rate will be higher and they profit according to who correctly forcastes the future rates. Is that the basic idea?
2
Posted on 1/17/13 at 9:21 pm to ClydeFrog
Interest rate hedging
Swaps are used to gain variable rate exposure on a fixed rate, or the other way around.
Swaps are used to gain variable rate exposure on a fixed rate, or the other way around.
This post was edited on 1/17/13 at 9:26 pm
Posted on 1/17/13 at 9:30 pm to ClydeFrog
Often it is more insurance than hoping someone else is wrong.
It's hard to evaluate the worth of a swap (hell, of any financial instrument) without considering everything else you have too. Swaps are an easy way to change your exposure profile, often more so than buying/selling something else you may have.
It's hard to evaluate the worth of a swap (hell, of any financial instrument) without considering everything else you have too. Swaps are an easy way to change your exposure profile, often more so than buying/selling something else you may have.
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