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Multinational Financial Management CH 9

This document is a chapter from a textbook on multinational financial management. It discusses interest rate and currency swaps, forwards, futures, and structured notes. Specifically, it defines interest rate and currency swaps, how they work, their purposes, and similarities. It also defines forward forwards, forward rate agreements, Eurodollar futures, and how they are used to manage interest rate risk. Finally, it briefly defines structured notes and inverse floaters.

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349 views14 pages

Multinational Financial Management CH 9

This document is a chapter from a textbook on multinational financial management. It discusses interest rate and currency swaps, forwards, futures, and structured notes. Specifically, it defines interest rate and currency swaps, how they work, their purposes, and similarities. It also defines forward forwards, forward rate agreements, Eurodollar futures, and how they are used to manage interest rate risk. Finally, it briefly defines structured notes and inverse floaters.

Uploaded by

ariftanur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Multinational Financial

Management
Alan Shapiro
9th Edition
J.Wiley & Sons

Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

Chapter 9
Swaps and Interest Rate
Derivatives

INTEREST RATE AND CURRENCY


SWAPS
I. INTEREST RATE AND CURRENCY SWAPS
A. INTEREST RATE SWAPS
1. Definition
an agreement between 2 parties to
exchange US$ interest payments for
a specific maturity on an agreed
notional amount.

HOW THE CLASSIC SWAP


WORKS
A. INTEREST RATE SWAPS (cont)
2. Notional principal: a reference
amount used only to calculate
interest expense but never
repaid.
3. Maturities: less than 1 to over 15
years

THE CLASSIC SWAP


4. Types
a. Coupon swap
b. Basis swap
5. LIBOR: the most important reference rate in a
swap
6. Swap Usage:
To reduce risk potential and costs.

THE CURRENCY SWAP


B. Currency Swaps
1. Definition
two parties exchange foreign currencydenominated debt at periodic intervals.
2. Purpose: similar to parallel loan

THE CURRENCY SWAP


3. Differences of a Currency Swap:
a. Currency swap is not a loan
b. No interest expense; no balance
sheet entry
c. The right to offset any non-payment
is more firmly established

THE CURRENCY SWAP


4. Similarities between Interest Rate and
Currency Swaps
a. Avoid exchange rate risk
b. Exchange rate is only a reference to
determine amounts exchanged
5. Economic Benefits of Swaps when
arbitrage prohibited, they provide
long-term financing.

INTEREST RATE FORWARDS AND


FUTURES
Forward and futures contracts:
- three types used to manage interest rate
risk
A. Forward forwards
B. Forward rate agreements
C. Eurodollar futures

INTEREST RATE FORWARDS AND


FUTURES
A. Forward forwards
1. a contract that fixes an interest rate today
on a future loan or deposit.
2. Contract conditions:
- specific interest rate
- principal amount of future loan
- start and ending dates of future interest
rate period

10

INTEREST RATE FORWARDS AND


FUTURES
B. Forward rate agreements (FRAs)
1. cash-settled
2. over-the-counter forward contract
company fixes an interest rate applied to
a specified future interest period on a
notional amount.

11

INTEREST RATE FORWARDS AND


FUTURES
C. Eurodollar Futures
1.
2.

12

A cash-settled futures contract for a 3- month


eurodollar deposit paying LIBOR
Contracts traded on:
a. Chicago Mercantile Exchange
b. London International Financial
Futures Exchange
c. Singapore International Monetary
Exchange

STRUCTURED NOTES
A. Definition
Interest-bearing securities whose interest payments
are determined by reference to a formula set in
advance and adjusted on specific reset dates.

13

STRUCTURED NOTES
B. Inverse Floaters
a floating-rate instrument whose interest rate moves
inversely with market interest rates.

14

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