Introduction:
Swaps have been growing at a increasing rate. The market is
designing creative and complex structures to provide tailor-made solutions.
The regulators are unable to design systems to effectively assess risks involved
in these transactions. Today the term “swap financing” is used
to describe a funding and a currency exposure management technique. It enables
corporations, agencies and institutions to cope with the problems of fluctuating
rates, imperfect capital markets, restrictive exchange control regulations and
accounting standards. Swaps are derivatives, which
involve a private agreement between two parties to exchange cash flows in the
future according to a prearranged formula. The underlying instruments are liabilities
or assets with interest expenses or incomes. Swap is essentially a derivative
used for hedging and risk management.
Historically, swaps had been arranged opportunistically when two companies had
requirements, which are exactly equal and opposite. The first recorded swaps
were negotiated in 1982. Since then, the markets have grown very rapidly. The
expansion in the swap market has occurred in response to the
challenging phenomena, which have characterized financial markets today – arbitrage
opportunities, tax regulations, capital controls, etc., as a result of market
imperfection, need for protection against interest rate and exchange rate risk,
improvements in computer technology and increasing integration of world capital
markets. Thus, swaps are powerful tool propelling global capital market integration.
The diverse requirements of corporate treasurers, bank liability managers, finance
minister and portfolio manage account for the rapid growth of the swap market.
A currency swap involves exchange of principal and interest payments in two
different currencies between two different parties. Swaps are
privately negotiated customized transactions; swaps are off balance sheet transactions
and have grown at a phenomenal rate. In a currency swap, one
party agrees to exchange principal and make regular interest payments in one
currency to a counter party for principal and periodic interest payments in
another currency. Swaps are useful in hedging exchange rate
and interest rate risks by taking advantages of arbitrage opportunities that
arise due to the prevailing imperfections in the capital market.
The interest rate swap market, in which borrowers contract to exchange interest
rate payments, has grown substantially in recent years. These instruments are
used by financial managers to reduce borrowing costs, increase asset returns,
or hedge interest rate risk. Major market participants include commercial and
investment banks, which both use and deal in swaps, securities firms, savings
and loan institutions, corporations and government agencies.
Number of Pages of Project Report: 58
Package Includes: Project Report
Project Format: Document (.doc)
Table of Contents of Project Report:
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Conceptual Framework
3.1 Basic Swap Structure
3.2 Evolution of Swap
3.3 Interest Rate Swap
3.4 Currency Swap
Chapter 4: Research Methodology
Chapter 5: Research Findings and Discussion
Chapter 6: Conclusion & Recommendations
Bibliography
Appendices