Swaps 2


Swaps 2 : Swaps take dozens of forms but often entail the exchange of one type of asset or payment for another. Some of the more common forms are: cross-border; currency; debt-for-charity; debt-for-commodity; debt-for-debt; debt-for-development; debt-for-equity; debt-for-export; debt-for-local-currency; debt-for-nature; discount; dual currency; interest rate; inward; premium; reverse; and vanilla. Minor variation in names is common. Currency swaps convert principal from the lender's currency into the debtor's currency and receiving interest payments in the debtor's currency. The swap, made to protect the principal from future changes in foreign exchange rates, involves a forward exchange contract to recover the currency involved. Debt swaps entail replacing the foreign liabilities of a debtor country with ownership or rights of value. A debt-for-equity swap replaces foreign liabilities with a stake in the debtor country's national enterprises; a debt-for-export swap replaces foreign liabilities with an arrangement to receive proceeds from the overseas sale of the debtor country's products or commodities; a debt-for-debt swap replaces an existing foreign liability with a new commitment from the debtor country. Interest rate swaps involve agreements on the means for exchanging future cash flows. Single currency interest rate swaps concern exchanging future cash flow in the same currency and offer a means for modifying the impact of future changes in interest rates on a company's profitability. Cross currency interest rate swaps concern exchanging future cash flows between one currency and another, traded either on a fixed or floating rate, and offer a means for limited the risk of converting financial interests between currencies. Swaps also involve arrangements whereby different sellers of similar commodities swap and deliver them to each other's customer if such action saves transportation costs. See: Derivatives
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