What is the forward swap?
Forward Swap is an exchange of financial instruments between two parties that occur in the future. Interest rates, currencies or commodities such as oil are usually confused. Forward Swap has a generally zero current value, a minus commission of a swap dealer. Historically, swaps are used useful at the hedge risks and comparing cash flows to prevent industrial regulations. It can be referred to as a forward Swap start, a delayed swap start or a deferred SWAP start, depending on the conventions of the financial institution. As with other supplementary contracts, the parties prefer to lock today for future stock exchanges using a forward swap.
The most common swap is solid to the floating interest rate. For example, a company A has only access to a rate loan, but favors the stability of a fixed rate loan. The B can borrow for a fixed rate, but would prefer the potential for profits provided by a variable rate. Decide to exchange where the exchange rate isThe fixed rate and the floating rate is a certain independent reference rate, such as the London interbank rate (Libor) plus a certain number of points.
Today's exchange market is huge and includes many types of forward swaps. Interest swaps can be determined on floating, floating on floating or even fixed on the basis of various currencies. Unlike the swap of interest rates, when only the difference in rates is settled, the monetary swap is an agreement on the exchange of principles and interest rates.
For example, the American company wants to expand its business in Japan next year and needs funds for a five -year project. The company could wait a year and hope for a favorable exchange rate or try to provide a loan in Japan. But it is easier to be less risky to organize a forward swap with a Japanese company that could be interested in locking with a lower interest rate available in US dollars.
There are other exotic forms of forward swaps. In the swap of its own capital, dividends are confused while the voting force is maintained. Swaption is an exchange with a built -in option, whether it participates in the swap in the future. Transmission with replacement with the Stripe (Stripe) is a swap with a floating frequency ceiling that is used to reduce volatility in the buyer's portfolio.
generally traded for the counter (OTC), forward swaps can be adapted to meet the needs of each party. One investor can use a forward swap to ensure interest rate or currency risk. Another investor may want to change duties with the annual settlement dates for liabilities with monthly settlement data. The situation of victory is created because the risk is moved towards those who want to carry it and create a more efficient market.