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Hi tutor,
I am struggling to understand the interest rate swaps.
Interest rate swaps are where two parties agree to exchange interest rate payments. Interest rate swaps can act as a means of switching from one type of interest to another, raising less expensive loans and securing better deposit rates.
Do the loans from the two parties have to be the same?
If they do not, wouldn’t one party suffer from having to pay higher interest?
If the loans do, then how does swapping interest rate payments help a company raise less expensive loans?Also, are futures and options methods for hedging against long term exchange rate/ interest rate risks like swaps?
Hope you could help me on these. Thank you 🙂
1. The amount swapped does have to be the same amount.
2. Interest is potentially saved because the parties have different credit ratings and the the difference between the two fixed interest rates and the two floating interest rates may not be the same. (There does not have to be a saving – it depends on the interest rates and the direction of the swap).
3. Futures and options are certainly methods for hedging again short-term change rate or interest rate risks.
Swaps are completely different and mainly apply to interest rates and are a way of potentially saving interest.Have you watched my free lectures on foreign exchange and interest rate risk management.
Yes I have, couldn’t quite understand swaps – was probably distracted and stressed out, but I understand it now. Thank you 🙂
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