What is swap constant maturity?
Swap constant maturity is the type of interest rate swap. In this type of swap there is a part with fixed interest and floating interest part, which is regularly reset compared to the fixed rate of financial instruments, such as the draft Treasury Act or the rate of government bonds. The exchanging time of maturity is longer than the decree from the financial instrument to which the swap is reset. For this reason, investors are susceptible to market changes for a longer period of time. Common investors who are interested in swaps with constant maturity include large corporations and financial institutions looking for higher revenues and diversified financing and life insurance companies that want to cover the payment of long -term insurance.
Swaps of constant maturity rates differ from standard interest swaps in how the return on investment is calculated. Unlike the standard interest rate swap, the floating leg of the swap constant maturity is regularly reset against a fixed level of tools such as bond or stock. In Astandard ÚThe year's rate, the floating leg is set against another interest rate, usually London's interbank rates (Libor).
The investor can choose a swap permanent maturity if Libor feels that Libor will drop compared to the exchange of a certain currency for a specified period of time. In this case, the investor would buy a constant repayment replacement by purchasing Libor and subsequently received the swap rate for a specified period of time. For example, an investor can buy a six -month -old Libor to get a three -year swap rate. This is essentially a long -term bet that the exchange rate will be higher than the Libor rate at the end of the investment period, which will bring the investor a higher return. This type of swap is not ideal for all investors and can be considered a bit risky due to fluctuating interest rates.
non -disclosed investors are generally not recommended to participate in this type of -investment or collateral. The nature of swaps with a constant maturity allows you to undoWomen's loss - if Libor is higher than the instrument at the end, the investor will lose the difference, no matter how high it can be. New investors who do not have to understand all the complicated aspects of the swap of constant maturity could eventually lose a lot of money. Another disadvantage of buying constant maturity is that it requires documentation from the International Swaps and Derivatives Association (ISDA), which can be expensive and time consuming.