Swaps are financial contracts between partles to exchange cash flows at specified times and are based on an underlying asset's value. Swaps are private agreements that are negotiated by many parties such as investment banks and brokers, and are traded in: O Primary markets O Over-the-counter markets Consider the case of Company A and Company B: Company A Company B Company A is a financing company. Company A has 30% debt in its captal structure, out of which 55% is floating-rate debt indexed to the LIBOR (London interbank offered rate). Company B is a bank. . Company B gives its depositors an average of 6% foxed return on the 10 million certificates of deposit in the bank. Company A financed company C and earns a fixed interest of 8% per annum. The bank lends money to corporations at floating rates indexed to the LIBOR. The financing company agrees to pay fixed-rate obligations to the bank, and the bank pays the financing company a floating-rate payment based on LIBOR Company A and Company B enter into an interest rate swap agreement with each other for three years. Six months into the contract, uBOR decreases by 0.50%. which of the two companies will benefit from the protection that the swap provides? Company A O Company B This is because its debt. So if LIBOR decreases, the company earns less but will have to pay the same interest on its debt. Because the companies got into an interest rate swap in which rate, a decrease in LIBOR would mean more interest earnings from the swap in the form of floxed interest that balances the decreased earnings from the floating interest rate. earns floating interest thet is indexed to the LIBOR but has to pay fixed interest on would pay the other company a fixed interest Another kind of swap is a credit default swap. A credit default swap (CDS) is a contract that tronsfers credit risk from one counterparty (protection buyer) to another counterparty (protection seller). the borrower defauits? O Protection buyer O Protection seller Swaps are financial contracts between partles to exchange cash flows at specified times and are based on an underlying asset's value. Swaps are private agreements that are negotiated by many parties such as investment banks and brokers, and are traded in: O Primary markets O Over-the-counter markets Consider the case of Company A and Company B: Company A Company B Company A is a financing company. Company A has 30% debt in its captal structure, out of which 55% is floating-rate debt indexed to the LIBOR (London interbank offered rate). Company B is a bank. . Company B gives its depositors an average of 6% foxed return on the 10 million certificates of deposit in the bank. Company A financed company C and earns a fixed interest of 8% per annum. The bank lends money to corporations at floating rates indexed to the LIBOR. The financing company agrees to pay fixed-rate obligations to the bank, and the bank pays the financing company a floating-rate payment based on LIBOR Company A and Company B enter into an interest rate swap agreement with each other for three years. Six months into the contract, uBOR decreases by 0.50%. which of the two companies will benefit from the protection that the swap provides? Company A O Company B This is because its debt. So if LIBOR decreases, the company earns less but will have to pay the same interest on its debt. Because the companies got into an interest rate swap in which rate, a decrease in LIBOR would mean more interest earnings from the swap in the form of floxed interest that balances the decreased earnings from the floating interest rate. earns floating interest thet is indexed to the LIBOR but has to pay fixed interest on would pay the other company a fixed interest Another kind of swap is a credit default swap. A credit default swap (CDS) is a contract that tronsfers credit risk from one counterparty (protection buyer) to another counterparty (protection seller). the borrower defauits? O Protection buyer O Protection seller
