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International Finance - Essay Example
Finance & Accounting
Pages 8 (2008 words)
1. [a] The main characteristics of interest rate, currency, and credit default swaps Interest rate swaps refer to an agreement entered into by two parties. One party undertakes to make interest payment to another party according to the terms of the agreement on scheduled dates in future…
Interest rate swaps are over the counter (private) transactions; and they are highly liquid financial derivatives that can be used by hedgers to manage both their fixed and floating assets and liabilities. A party that pay fixed rate is referred to as the payer and the receiving party is called the receiver. For example, X agrees to pay fixed rate of interest under specified time intervals to W and in return, X receives variable or floating interest on notional principle from W. The types of currency swaps include fixed for floating swap for same currency, fixed for floating rate for different currencies, floating for floating swap for same currency, floating for floating rate for different currencies and fixed for fixed rate swap for different currencies. Currency swap refers to a foreign-exchange currency agreement entered into by two parties in relation to principle alone or with interest for payment of a specified loan sum in one currency for an equivalent principle and interest of a specified loan sum in another currency (Shamah, 2003). Payments are made periodically and at maturity or termination of the contract, the principle amounts are re-exchanged. Currency swaps are over the counter financial instruments. Foreign currency swaps are long term because they involve high costs associated with finding counterparty. ...
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