29 January 2008
In finance, a swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.
The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the underlying prices.
28 February 2008
A swap is nothing but a barter or exchange but it plays a very important role in international finance. A swap is the exchange of one set of cash flows for another. A swap is a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first. Both payments take place on specified dates. Different formulas are used to determine what the two sets of payments will be.
Classification of swaps is done on the basis of what the payments are based on. The different types of swaps are as follows.
07 March 2008
IN SIMPLE LANGUAGE, A SWAP IS AN EXCHANGE. THE UNDERLYING ASSETS FORM THE BASIS FOR DECIDING SWAP RATIO/ EXCHANGE. THESE DAYS CURRENCY ,INTEREST,COMMODITY SWAPS ARE POPULAR . EVEN SHARES ARE SWAPPED, CALLED SWAP OF SHARES, UNDER WHICH COMPANY 'A' ALLOTS SHARES TO COMPANY 'B' AND VICE VERSA. IT IS A NON CASH ALL SHARES DEAL. EVEN STOCK EXCHANGES RECOGNISE THIS AS A PREF. ALLOTMENT, WHERE OF COURSE A VALUATION REPORT ON SHARES ALLOTTED WILL BE ASKED AS BASIS ON WHICH THE SHARES ARE VALUED FOR SWAP PURPOSE. IN RECENT INDIAN CORPORATE HISTORY,FOREX DERIVATIVE TRANSACTIONS ENTERED BY CORPORATES WHERE BIG INDIAN PRIVATE BANKS ARE INVLVED LED TO HUGE LOSSES IN FOREX DERIVATIVES. THIS IS BECAUSE THE NATURE OF UNDERLYING DERIVATIVES-THE RISK ASSESSMENT IN FOREX FLUCTUATIONS WERE NOT /COULD NOT BE PROPERLY EVALUATED. WHILE SWAPPING UP ONE CURRENCY FOR ANOTHER, THE INTERNATIONAL FIN. MARKETS,WORLD ECONOMIES,INTERNATIONAL TRADE CHANGES IN EMERGING MARKETS ALL PLAY VITAL ROLE. SWAPS IF PLAYED WELL WITH ACUMEN AND GRASP OF INTERNATIONAL FIN. MARKETS GIVE RISE TO SPECULATIVE PROFITS. R.V.RAO
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