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This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 January 2011 Hi experts,
what is interest swapping?
How we can do practically interest swaps?Can any one tel me wat is the advantage of swaps?
Is there only interest swaps?
To whom we have to do this transactions?
Pls explain me with a example.

Thanks

CA Sanat Pyne

CA Sanat Pyne (Expert)
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15 January 2011 Interest rate swaps are simply the exchange of one set of cash flows (based on interest rate specifications) for another. Because they trade OTC, they are really just contracts set up between two or more parties, and thus can be customized in any number of ways.

Generally speaking, swaps are sought by firms that desire a type of interest rate structure that another firm can provide less expensively. For example, let's say Cory's Tequila Company (CTC) is seeking to loan funds at a fixed interest rate, but Tom's Sports Inc. (TSI) has access to marginally cheaper fixed-rate funds. Tom's Sports can issue debt to investors at its low fixed rate and then trade the fixed-rate cash flow obligations to CTC for floating-rate obligations issued by TSI. Even though TSI may have a higher floating rate than CTC, by swapping the interest structures they are best able to obtain, their combined costs are decreased - a benefit that can be shared by both parties.

for details
visit this link
http://home.earthlink.net/~green/whatisan.htm

for example
http://www.isda.org/educat/pdf/IRS-Diagram1.pdf