What is a cancellable swap?
What is a cancellable swap? It is a combination of an interest rate swap and a receiver’s swaption that may be cancelled by the borrower at no cost on an agreed future date. The cost of the swaption is embedded into the fixed rate of the swap. The swaption’s strike rate is the same as the fixed rate.
How does swap financing work?
In finance, a swap is a derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another. Of the two cash flows, one value is fixed and one is variable and based on an index price, interest rate, or currency exchange rate.
What is accreting swap?
An accreting principal swap is a derivative contract in which two counterparties agree to exchange cash flows—usually a fixed rate for a variable rate, as with most other types of interest rate or cross-currency swap contracts.
How are swap termination fees calculated?
The approximate termination fee would be calculated as: fixed rate of interest (6%) – current variable rate (4.5%) = 1.5% x unexpired term of the Swap Contract (four years) x outstanding balance of the loan ($5 million) = $300,000 penalty!
What is Roller Coaster swap?
A rollercoaster swap allows the time (tenor) between regular payments to be extended or shortened in order to match seasonally fluctuating cash flows. The size of a rollercoaster swap’s notional amount is adjustable, although the net present value (NPV) of the transaction remains unchanged.
How do I get out of a swap loan?
If the bank loses the collateral, they have the right to terminate the swap. If the new loan is indexed similarly to the now paid off loan (e.g. LIBOR), the borrower can transfer the swap to the new bank. Such action is called a “novation”. The old bank is simply replaced by the new one.
How do banks make money on equity swaps?
The bank makes its money through commissions, interest spreads and dividend rake-off (paying the client less of the dividend than it receives itself). It may also use the hedge position stock (1,000 Vodafone in this example) as part of a funding transaction such as stock lending, repo or as collateral for a loan.
How many payment legs an equity swap has?
However, unlike an interest rate swap that has only one fixed side leg, an equity swap has two legs of cash flow. In an equity swap, one of the parties will pay the floating leg, and in the return of which, they will get returns on an index of the stock as agreed upon.
What are interest rate swaptions?
An interest rate swaption is an option that provides the borrower with the right but not the obligation to enter into an interest rate swap on an agreed date(s) in the future on terms protected by the swaption. The buyer/borrower and seller agree the price, expiration date, amount and fixed and floating rates.
What is equity swap with example?
An example would be if a client (one party) is paying interest (LIBOR), whereas the bank (another party) is agreeing to pay the return on the S&P 500 index. The outcome of this swap is that the client is in a position of having effectively borrowed money to invest in the securities of the S&P 500 index.
Is a CFD a total return swap?
A contract for difference (CFD) is similar to a total rate of return swap except that payment only occurs once on the contract expiration date. A CFD may have a single stock, a basket of stocks, or an index as its underlying reference asset.
Who are swap facilitators?
Most swap facilitators today are swap dealers who willingly act as counterparties to swaps. 9. In the context of interest rate swaps, “basis risk” is the risk arising from an unanticipated change in the yield relationship between the two instruments involved in the swap.
A cancellable swap is a combination of an interest rate swap and a receiver’s swaption that may be cancelled by the borrower at no cost on an agreed future date.
What is an equity swap?
The exchange of one stream (leg) of equity-based cash flows with another stream (leg) of fixed-income cash flows What is an Equity Swap Contract?
Why would an investor choose a callable swap?
An investor might choose a callable swap if they expect the rate to change in a way that would adversely affect the fixed rate payer. For example, if the fixed rate is 4.5% and interest rates on similar derivatives with similar maturities fall to perhaps 3.5%, the fixed rate payer might call the swap to refinance at that lower rate.
What are the risks involved in an equity swap?
Because equity swaps trade OTC, there is counterparty risk involved. An equity swap is similar to an interest rate swap, but rather than one leg being the “fixed” side, it is based on the return of an equity index.