What is the swap span?

Sawap Spreed is the difference in interest rates between the investment on a fixed rate and the interest rate. The interest rate is a derivative investment in which one investor trades a number of interest payments for a series of cash flows of the other investor. One number of payments usually has a fixed interest rate and the other has a variable interest rate. In some interest rate swaps, both investments have a variable interest rate. The exchange of two fixed interest rate investments would not make sense, as cash flows can be foreseen.

The swap span is an additional amount that the investor would earn on the interest rate swap compared to the investment on a fixed rate. If a fixed -rate investment pays 5.5 percent and the interest rate pays 5.9 percent, the swap span is 0.4 percent or 40 basis points. There are 100 basis points at one percentage point.

To determine whether the interest rate makes sense for both parties, investors deal with the differential of the quality range (QSD), which is the calculation of the Warm OlympicsIt icy credibility of both sides in the transaction. Suppose a company A can borrow a 3 percent or Libor floating rate at a fixed rate, London's interbank offered a rate commonly used for night loans between banks. The company B, which has a better credit rating than Company A, can borrow a fixed rate of 2.5 percent or a floating rate Libor Minus 0.25 percent. The difference with a fixed rate between the two companies is 0.5 percent and the floating rate differential is 0.25 percent. The difference between the two rates is QSD, which in this case is 0.25 percent. Because it is positive, the transaction is beneficial for both societies.

Sometimes two investments involved in the interest rate swap are denominated in various currencies. In some cases, one country has relatively lower fixed interest rates, while the others have relatively lower floating interest rates. This can affect the swap span and may be a factor in assessing whether the interest rate for both parties is advantageous.

Antipartta in interest swap can be a swap seller, which is compensated for its services by swap span. In other words, the difference in interest rates between the investment on the fixed rate and the swap of interest rates is compensated by the swap seller. Because the swap span is based on other basic investments, they are considered derivatives.