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SWAPS AND INDIAN

SWAP MARKET
Presented by:-
Rajdeep Saini
Roll no:- 47
SWAPS
• A swap is nothing but a barter or
exchange.
• 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.
Classification of Swaps
• Interest rate swaps

• Currency Swaps

• Commodity swaps

• Equity swaps
INDIAN SWAP MARKET
• At present only swaps are the only
types of rupee derivatives which
can be traded in India.

• Banks cannot trade in or offer


options on rupee interest rates,
either stand- alone or embedded in
swaps.
There are 3 main categories of
products, which in turn have
different benchmarks.

• Plain Vanilla Interest Rate Swaps

• Currency Swaps

• G-Sec Linked Swaps


Plain Vanilla Interest Rate
Swaps
• Most basic and actively traded
instruments in the market.
• Benchmarks are:-
- Overnight Index Swaps (OIS)
- MITOR
- MIFOR
Figure 1: Cash flows for a plain vanilla
interest rate swap
For example, on December 31, 2006,
Company A and Company B enter into a
five-year swap with the following terms:
• Company A pays Company B an amount equal to 6%
per annum on a notional principal of $20 million.
• Company B pays Company A an amount equal to one-
year LIBOR + 1% per annum on a notional principal of
$20 million.
Overnight Index Swaps (OIS)

• Most popular and liquid benchmark,


especially in the interbank market.

• 1st benchmark that was actively used


by banks.

• Known as “MIBOR”.
MITOR (Mumbai Inter Bank
Offer Rate)

• Not popular benchmark as the OIS.

• Underlying overnight floating rupee


rate is derived from the USD Fed
Funds rate and USD/INR/C/T
Premia.
MIFOR (Mumbai Interbank
Forward Offer Rate
• Another popular benchmark.

• Derived from USD LIBOR (London


Interbank Offered Rate) and the USD/INR
Forward Premia.

• Large number of Indian Corporates


regularly use this benchmark.
Currency Swaps
• These are interest rate derivatives whereby
rupee debt held by banks or corporates can be
swapped into debt in another currency or
vice-versa.
• When there is no optionality permitted on the
rupee leg of the currency swap, there is
substantial scope for employing more
sophisticated hedging strategies.
• There are variants of currency swaps like
coupon swaps and Principal only swaps
(POS).
For example, Company C, a U.S. firm, and Company D, a
European firm, enter into a five-year currency swap for $50
million. Let's assume the exchange rate at the time is $1.25
per euro (i.e., the dollar is worth $0.80 euro). First, the
firms will exchange principals. So, Company C pays $50
million, and Company D pays ¬40 million. This satisfies
each company's need for funds denominated in another
currency (which is the reason for the swap).

Figure 2: Cash flows for a plain vanilla currency


swap, Step 1.
Figure 3: Cash flows for a plain vanilla currency swap, Step 2
For this example, let's say the agreed-upon dollar-denominated interest rate is
8.25%, and the euro-denominated interest rate is 3.5%. Thus, each year, Company
C pays ¬40,000,000 * 3.50% = ¬1,400,000 to Company D. Company D will pay
Company C $50,000,000 * 8.25% = $4,125,000.

Figure 4: Cash flows for a plain vanilla currency swap, Step 3


Finally, at the end of the swap (usually also the date of the final interest payment),
the parties re-exchange the original principal amounts. These principal payments
are unaffected by exchange rates at the time.
G-Sec Linked Swaps
• It is linked to GOI.

• They allow banks and


corporates to take views on
relative movements of GOI
yields and corporate spreads.
CONCLUSION
THANK YOU…..