Скачать презентацию 6 -0 Finance 457 Swaps 6 Chapter Six Скачать презентацию 6 -0 Finance 457 Swaps 6 Chapter Six

efc15709cafa9223a0accf58f19aa56e.ppt

  • Количество слайдов: 25

6 -0 Finance 457 Swaps 6 Chapter Six 6 -0 Finance 457 Swaps 6 Chapter Six

6 -1 Finance 457 Chapter Outline 6. 1 Mechanics of interest rate swaps 6. 6 -1 Finance 457 Chapter Outline 6. 1 Mechanics of interest rate swaps 6. 2 The comparative-advantage argument 6. 3 Swap quotes and LIBOR zero rates 6. 4 Valuation of interest rate swaps 6. 5 Currency swaps 6. 6 Valuation of currency swaps 6. 7 Credit risk 6. 8 Summary & Conclusions

6 -2 Finance 457 Swaps Contracts: Definitions • In a swap, two counterparties agree 6 -2 Finance 457 Swaps Contracts: Definitions • In a swap, two counterparties 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 • This is often called a currency swap; fixed for fixed rate debt service in two (or more) currencies.

6 -3 Finance 457 The Swap Bank • A swap bank is a generic 6 -3 Finance 457 The Swap Bank • A swap bank is a generic term to describe a financial institution that facilitates swaps 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 match it with a counterparty.

6 -4 Finance 457 An Example of an Interest Rate Swap • Consider this 6 -4 Finance 457 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. and wishes to raise $10, 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 floatingrate notes at LIBOR to finance floating-rate Eurodollar loans.

6 -5 Finance 457 An Example of an Interest Rate Swap • Firm B 6 -5 Finance 457 An Example of an Interest Rate Swap • Firm B is a BBB-rated U. S. company. It needs $10, 000 to finance an investment with a fiveyear economic life. – Firm B is considering issuing 5 -year fixed-rate Eurodollar bonds at 11. 75 percent. – Alternatively, firm B can raise the money by issuing 5 year floating-rate notes at LIBOR + ½ percent. – Firm B would prefer to borrow at a fixed rate.

6 -6 Finance 457 An Example of an Interest Rate Swap The borrowing opportunities 6 -6 Finance 457 An Example of an Interest Rate Swap The borrowing opportunities of the two firms are:

6 -7 Finance 457 An Example of an Interest Rate Swap 10 3/8% Bank 6 -7 Finance 457 An Example of an Interest Rate Swap 10 3/8% Bank LIBOR – 1/8% Bank A 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 you 10 3/8% on $10 million for 5 years

6 -8 Finance 457 An Example of an Interest Rate Swap ½% of $10, 6 -8 Finance 457 An Example of an Interest Rate Swap ½% of $10, 000 = $50, 000. That’s quite a cost savings per year for 5 years. 10 3/8% Swap Bank LIBOR – 1/8% Bank 10% A Here’s what’s in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing position of -10 3/8 + 10 + (LIBOR – 1/8) = LIBOR – ½ % which is ½ % better than they can borrow floating without a swap.

6 -9 Finance 457 An Example of an Interest Rate Swap The swap bank 6 -9 Finance 457 An Example of an Interest Rate Swap The swap bank makes this offer to company B: You pay us 10½% per year on $10 million for 5 years and we will pay you LIBOR – ¼ % per year on $10 million for 5 years. Swap Bank 10 ½% LIBOR – ¼% Company B

6 -10 Finance 457 An Example of an Interest Rate Swap Here’s what’s in 6 -10 Finance 457 An Example of an Interest Rate Swap Here’s what’s in it for B: Swap Bank They can borrow externally at LIBOR + ½ % and have a net ½ % of $10, 000 = $50, 000 that’s quite a cost savings per year for 5 years. 10 ½% LIBOR – ¼% borrowing position of 10½ + (LIBOR + ½ ) - (LIBOR - ¼ ) = 11. 25% which is ½% better than they can borrow floating. Company B LIBOR + ½%

6 -11 Finance 457 An Example of an Interest Rate Swap The swap bank 6 -11 Finance 457 An Example of an Interest Rate Swap The swap bank makes money too. Swap 10 3/8% Bank 10 ½% LIBOR – 1/8% Bank A ¼% of $10 million = $25, 000 per year for 5 years. LIBOR – ¼% LIBOR – 1/8 – [LIBOR – ¼ ]= 1/8 10 ½ - 10 3/8 = 1/8 ¼ Company B

6 -12 Finance 457 An Example of an Interest Rate Swap The swap bank 6 -12 Finance 457 An Example of an Interest Rate Swap The swap bank makes ¼% Swap 10 3/8% Bank LIBOR – 1/8% 10 ½% LIBOR – ¼% Bank Company A B A saves ½% B saves ½%

6 -13 Finance 457 An Example of a Currency Swap • Suppose a U. 6 -13 Finance 457 An Example of a Currency Swap • Suppose a U. S. MNC wants to finance a £ 10, 000 expansion of a British plant. • They could borrow dollars in the U. S. where they are well known and exchange for dollars for pounds. – This will give them exchange rate risk: financing a sterling project with dollars. • They could borrow pounds in the international bond market, but pay a premium since they are not as well known abroad.

6 -14 Finance 457 An Example of a Currency Swap • If they can 6 -14 Finance 457 An Example of a Currency Swap • If they can find a British MNC with a mirror-image financing need they may both benefit from a swap. • If the spot exchange rate is S 0($/£) = $1. 60/£, the U. S. firm needs to find a British firm wanting to finance dollar borrowing in the amount of $16, 000.

6 -15 Finance 457 An Example of a Currency Swap Consider two firms A 6 -15 Finance 457 An Example of a Currency Swap Consider two firms A and B: firm A is a U. S. –based multinational and firm B is a U. K. –based multinational. Both firms wish to finance a project in each other’s country of the same size. Their borrowing opportunities are given in the table below.

6 -16 Finance 457 An Example of a Currency Swap Bank $8% £ 11% 6 -16 Finance 457 An Example of a Currency Swap Bank $8% £ 11% $8% $9. 4% £ 12% Firm A B £ 12%

6 -17 Finance 457 An Example of a Currency Swap A’s net position is 6 -17 Finance 457 An Example of a Currency Swap A’s net position is to borrow at £ 11% Swap Bank $8% £ 11% $8% $9. 4% £ 12% Firm A B A saves £. 6% £ 12%

6 -18 Finance 457 An Example of a Currency Swap B’s net position is 6 -18 Finance 457 An Example of a Currency Swap B’s net position is to borrow at $9. 4% Swap Bank $8% £ 11% $8% $9. 4% £ 12% Firm A B £ 12% B saves $. 6%

6 -19 Finance 457 An Example of a Currency Swap The swap bank makes 6 -19 Finance 457 An Example of a Currency Swap The swap bank makes money too: Swap Bank $8% £ 11% $8% Firm A 1. 4% of $16 million financed with 1% of £ 10 million per year for 5 years. $9. 4% £ 12% Firm £ 12% At S 0($/£) = $1. 60/£, that is a gain of $124, 000 per B year for 5 years. The swap bank faces exchange rate risk, but maybe they can lay it off (in another swap).

6 -20 Finance 457 Variations of Basic Swaps • Currency Swaps – – fixed 6 -20 Finance 457 Variations of Basic Swaps • Currency Swaps – – fixed for floating for floating amortizing • Interest Rate Swaps – zero-for floating – floating for floating • Exotica – For a swap to be possible, two humans must like the idea. Beyond that, creativity is the only limit.

6 -21 Finance 457 Risks of Interest Rate and Currency Swaps • Interest Rate 6 -21 Finance 457 Risks of Interest Rate and Currency Swaps • Interest Rate Risk – Interest rates might move against the swap bank after it has only gotten half of a swap on the books, or if it has an unhedged position. • Basis Risk – If the floating rates of the two counterparties are not pegged to the same index. • Exchange Rate Risk – In the example of a currency swap given earlier, the swap bank would be worse off if the pound appreciated.

6 -22 Finance 457 Risks of Interest Rate and Currency Swaps • Credit Risk 6 -22 Finance 457 Risks of Interest Rate and Currency Swaps • Credit Risk – This is the major risk faced by a swap dealer—the risk that a counter party will default on its end of the swap. • Mismatch Risk – It’s hard to find a counterparty that wants to borrow the right amount of money for the right amount of time. • Sovereign Risk – The risk that a country will impose exchange rate restrictions that will interfere with performance on the swap.

6 -23 Finance 457 Pricing a Swap • A swap is a derivative security 6 -23 Finance 457 Pricing a Swap • A swap is a derivative security so it can be priced in terms of the underlying assets: • How to: – Plain vanilla fixed for floating swap gets valued just like a bond. – Currency swap gets valued just like a nest of currency futures.

6 -24 Summary & Conclusions Finance 457 • Swaps can be used to hedge; 6 -24 Summary & Conclusions Finance 457 • Swaps can be used to hedge; a swap can be viewed as a portfolio of futures with different maturities.