What is the exchange of foundation?

When an investor trades in two different floating financial instruments with two different rates or maturity, they face the risk of fluctuating the prices of both financial instruments. Price fluctuations could cause profits, but could also cause losses. The basic swap removes uncertainty from the situation. The investor signs a contract for the exchange of the base with another party to replace the cash flow at one floating rate for the cash flow at another floating rate, so that only one floating rate must be dealt with. Financial entities carry out basic swaps on the market with an over -the -counter (OTC) without the help of a formal stock exchange institution.

There are two types of basic swaps. Simple base replacement includes only one currency, while exchanges across power include two currencies. Simple bases are more common, but both swaps have similar concepts. For example, the bank pays its creditors for the rate of London's interbank offer (Libor) and receives loans for the main rate. Basic swap removes rosThe part between the bank's income and the cost of the bank, which eliminates the risk of loss of interest rate changes.

Simple base replacement may include the same floating speed with different maturity. For example, an investor and receive payments based on a three -month rate Libor, but make payments for a six -month rate Libor. In order to coincide with his cash flows, he will sign a contract for the provision of incoming cash flows-the three-month rate Libor-Strani B in exchange for receiving cash flows based on a six-month rate of Libor. In such a contract, the investor A would pay Stánei B every three months, while Party B would pay the investor every six months. Otherwise, both parties could pay for the same data, with an investor and accumulation of two payments and paying every six months.

Another type of base exchange is the one that includes two currencies. Multinational financial entities that process more than one currency,They usually use currency swaps to remove the risk of currency fluctuations. They use swaps across currencies to ensure the appropriate liquid currency delivery. The company would sign a contract for exchange for exchange of liquid currency for less liquid currency.

Basic swaps are most common in the US, where several floating indices are used. Standard American floating indices include commercial paper (CP), Libor, Prime and T-Bill. Other countries have fewer floating indices and perform fewer swaps.