What is a currency basis swap?
What is a currency basis swap?
A cross currency basis swap is a floating-for-floating exchange of interest rate. payments and notional amounts in two different currencies.
What is a USD swap?
A swap is an agreement between two counterparties to exchange cash flows linked to two different indices at one or more dates in the future. Swaps have been used in conjunction with indices relating to interest and exchange rates as well as commodity and equity prices.
How does a basis swap work?
A basis rate swap (or basis swap) is a type of swap agreement in which two parties agree to swap variable interest rates based on different money market reference rates. The goal of a basis rate swap is for a company to limit the interest rate risk it faces as a result of having different lending and borrowing rates.
What is swap basis risk?
Basis risk on a floating-to-fixed rate swap is the potential exposure of the issuer to the difference between the floating rate on the variable rate demand obligation bonds and the floating rate received from the swap counterparty.
How are basis swaps quoted?
Basis swaps are quoted as a spread over a reference index. For example, 3-month LIBOR is frequently used as a reference. Spreads are quoted over it.
Why do countries do currency swaps?
Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on foreign currency loans which it has already taken out.
What is the benefit of a currency swap?
Swapping allows companies to revise their debt conditions to take advantage of current or expected future market conditions. Currency and interest rate swaps are used as financial tools to lower the amount needed to service a debt as a result of these advantages.
How are swap rates quoted?
Swaps are typically quoted in this fixed rate, or alternatively in the “swap spread,” which is the difference between the swap rate and the equivalent local government bond yield for the same maturity.
What is a basis rate swap?
A basis rate swap is a type of swap in which two parties swap variable interest rates based on different money markets, usually to limit interest-rate risk that a company faces as a result of having differing lending and borrowing rates.
What are the interest rate variations for currency swaps?
Interest rate variations for currency swaps include fixed rate to fixed rate, floating rate to floating rate, or fixed rate to floating rate. Currency swaps were originally done to get around exchange controls, governmental limitations on the purchase and/or sale of currencies.
What is a cross currency swap?
A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest and sometimes of principal in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract. Currency swaps were originally done to get around exchange controls.
What is the difference between currency swap and NDS?
This means that there is no actual delivery of the two currencies involved in the swap, unlike a typical currency swap where there is physical exchange of currency flows. Instead, periodic settlement of a NDS is done on a cash basis, generally in U.S. dollars.