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Evolution of Swap Contracts
  Parallel Loans




                               1
 Currency Swap




 Currency-Coupon Swap




 Interest Rate Swap




 Basis Swap




                         2
 Oil Swap




 Equity Swap




                3
 The Market

  Development
                  more standardized
    Broker mkt.                       Dealer mkt.

    Secondary mkt.
    Swap positions can be
          traded
          unwiding       candellation
                         writing a mirror swap
  Rationale for Swap

  Credit Arbitrage

  Comparative Advantage (Table 8-1)

  Underpriced Credit Risk

  Differential CF Packages

  Info. Asymmetries

  Tax & Regulatory Arbitrage

  Exposure Management

  Synthetic Instruments

  Liquidity
  Bid-ask spreads small


                                                    4
 The Price

    Swap = portfolio of loans

   Swap Pricing Conventions

    (Fig 8-10)

   Valuation

    Pricing an At-market Swap




                                 5
Q: Dealer (PB) 如何報 fixed coupon?

  1.6-mo 後 PB 將收 floating:


  2.At origination: PV (at-mkt swap) = 0




   Marked the Swap to Market
    On the morning of July 24, LIBOR YC (zero-coupon courve)
    shifts up by 1% 0 R 6 =9%, 0 R12 =11%




                                                           6
Applications of Swaps
  Modify B/S Items
 Debts
 Assets
 Create synthetic instruments

                             ~ ~ ~
  Modify exposure of CFs to e , r , p
   Income
   Cost
   Macro hedge

  Using Swap to Manage Interest Rate Risk
    (Table 9-1)

  Create Synthetic r debt
    (Fig.9-1)

  Gap management

 Using Swaps to Manage Foreign Exchange Rate Risk
  (Table 9-2)




                                                     7
 Using Swaps to Manage Commodity Price Risk
  (Table 9-3)
  Energy user faces two types of risk

  Governmental entities use derivatives to control energy
   budgets


  FMC


  Using Swap to Manage Equity Price Risk
   (Table 9-4)
   (Fig 9-2)


  Using Swap to Reduce TCs




                                                             8
 Using Swap to Increase Debt Capacity
  Mexicana de Cobre
  (P182)




 Using Swaps to Create Synthetic Instruments
  ~
  r debt+buy IRS  synthetic r loan
  r debt+sell IRS  synthetic ~ loan
                              r
  ~
  r debt+buy 2 IRS  inverse FRN




                                                9
          NTD Bond + NTD Swap

Mechanism
          (1)NTD Principal

                                      (2)NTD Coupon
 NTD                         Issuer                                   Swap
        (2)NTD Coupon                 (2)NTD 90-day secondary money   Bank
 Bond
                                      market mid-rate+-spread


          (3)NTD Principal




                                                                        10
      Euro Convertible Bond Asset Swap

  Mechanism

        (1)USD Principal
                                             (2)Coupon/Put Value/
                                                Stock Value

                                  Investor                           Swap
ECB   (2)Coupon/Put Value/Stock              (2)USD Libor + Spread   Bank
         Value



         (3)NTD Principal




                                                                        11

				
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