Swaps

Interest position Swaps Contractual agreement between 2 parties to rally fire retributions on debt over an agreed pointedness all(prenominal) allowance is calculated using a different busy range index Do not exc adverte cardinal debt asterisk amounts. The primary(prenominal) is used only for the calculation of interest payment Most common type (plain vanilla) is improve for float 1 An representative of a Plain Vanilla Interest invest Swap An agreement by Microsoft to receive 6month LIBOR & pay a decided score of 5% per annum every 6 months for 3 years on a notional principal of $ c million Next slide illustrates silver flows Cash hang ups to Microsoft ---------Millions of Dollars--------LIBOR FLOATING Date Mar.5, 2010 Sept. 5, 2010 Mar.5, 2011 Sept. 5, 2011 Mar.5, 2012 Sept. 5, 2012 Mar.5, 2013 Rate 4.2% 4.8% 5.3% 5.5% 5.6% 5.9% 6.4% +2.10 +2.40 +2.65 +2.75 +2.80 +2.95 2.50 2.50 2.50 2.50 2.50 2.50 0.40 0.10 +0.15 +0.25 +0.30 +0.45 4 FIXED m ake Cash mix Cash Flow Cash Flow Options, Futures, and Other Derivatives, 7th Ed, Ch 7, copyright © buns C. Hull 2010 3 Options, Futures, and Other Derivatives, 7th Ed, Ch 7, Copyright © John C. Hull 2010 Example 2: Plain Vanilla Swap familiar galvanizing Fixed Rate 5-year bond Floating Rate debt 10% LIBOR 3Com 10.

6% LIBOR + 30bp traditional Solutions Each company issues bonds in lust market GE unavoidably floating rate living so it issues floating rate bonds 3Com take fixed rate finance so it issues fixed rate bonds Suppose GE needs floating rate financing and 3Com needs fixed ra te financing. Details: suppose each compa! ny needs $100M Traditional Solution Swap Solution Companies issue bonds in opposite markets and swap into in demand(p) form of financing GE needs floating rate financing but issues fixed 3Com needs fixed rate financing but issues floating GE and 3Com enter into an agreement to exchange interest payments on debt Note: Notional or principal amount ($100M) is not exchanged General Electric...If you want to get a extensive essay, order it on our website: BestEssayCheap.com

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