As the terms points out such instrument or technically say contracts permit one to exchange one asset with another asset which is trad-able. The causes for which such exchange could be carried out or preferred could include several possible reasons some of them being a requirement for change in maturity (similarly in case of bonds), quality of the assets being secured (most likely in case of stocks and bonds) or some particular change in the investment objectives being pursued by investors. The types of assets that are getting covered by such swaps have been growing over time and the current introduction has been those of currency swaps and interest rate swaps.
Therefore a swap is nothing but an exchange of one set of cash flow with another set of cash flow and the related firms liking the change for them. A common swap contain four major components those being Benchmark Price (there are benchmark instruments relies on which most f the Swaps are executed, Liquidity (reflects the accessibility of counter parties for taking part in swaps), Transaction Cost (the cost related to get this swap arrangement and contract in place) and Credit Risk (one of the main components of any financial instruments, credit risk goes a long way in determination of pricing of swaps.
The practicality of swaps requires a deeper understanding of the economic variables and their inter relation. We are aware that several firms across different countries have different associated comparative advantages particularly in terms of interest rates. It is in this contrasting yet mutually agreeable win-win situation creation that swaps turns into effective financial tools to be utilized. One good explainable instance would be case where a firm might have lower fixed interest rates related with it while on the other hand there might be another one which once again have lower interest rates related but a floating one. The two firms might get in touch with each other and agree to few swap contract thus as to draw advantages out of the lower interest rates scenario.
Once again like any other derivative contracts in place, price determination and terms of a swap could be extensively varied and dependent on multiple factors. Though a swap would definitely have a set date of maturity and set rule for cash flow determination. Preferably there is many times third party included in forms of banks when second party is not a bank. Bank facilitates this transaction and charge a premium for the service that is being provided by them. The calculated and agreement have their typicality associated for the several assets bases that are being offered by Swaps and hence reflecting upon each of them needs specific look at associated dynamics of same. The most accepted of the swap categories includes Currency Swaps, Interest Rate Swaps, Commodity Swaps and Equity Swaps.
Therefore a swap is nothing but an exchange of one set of cash flow with another set of cash flow and the related firms liking the change for them. A common swap contain four major components those being Benchmark Price (there are benchmark instruments relies on which most f the Swaps are executed, Liquidity (reflects the accessibility of counter parties for taking part in swaps), Transaction Cost (the cost related to get this swap arrangement and contract in place) and Credit Risk (one of the main components of any financial instruments, credit risk goes a long way in determination of pricing of swaps.
The practicality of swaps requires a deeper understanding of the economic variables and their inter relation. We are aware that several firms across different countries have different associated comparative advantages particularly in terms of interest rates. It is in this contrasting yet mutually agreeable win-win situation creation that swaps turns into effective financial tools to be utilized. One good explainable instance would be case where a firm might have lower fixed interest rates related with it while on the other hand there might be another one which once again have lower interest rates related but a floating one. The two firms might get in touch with each other and agree to few swap contract thus as to draw advantages out of the lower interest rates scenario.
Once again like any other derivative contracts in place, price determination and terms of a swap could be extensively varied and dependent on multiple factors. Though a swap would definitely have a set date of maturity and set rule for cash flow determination. Preferably there is many times third party included in forms of banks when second party is not a bank. Bank facilitates this transaction and charge a premium for the service that is being provided by them. The calculated and agreement have their typicality associated for the several assets bases that are being offered by Swaps and hence reflecting upon each of them needs specific look at associated dynamics of same. The most accepted of the swap categories includes Currency Swaps, Interest Rate Swaps, Commodity Swaps and Equity Swaps.
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