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Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons

Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. Special Financing and Interest Rate Risk Management Vehicles. Chapter 13. INTEREST RATE AND CURRENCY SWAPS.

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Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons

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  1. Foundations of Multinational Financial ManagementAlan ShapiroJohn Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

  2. Special Financing and Interest Rate Risk Management Vehicles Chapter 13

  3. INTEREST RATE AND CURRENCYSWAPS • I. INTEREST RATE AND CURRENCY • SWAPS • A. INTEREST RATE SWAPS • 1. Definition • an agreement between 2 parties to • exchange US$ interest payments • for a specific maturity on an agreed notional amount.

  4. THE CLASSIC SWAP • a. Notional principal: a reference amount used only to calculate interest expense but never repaid. • b. Maturities: less than 1 to over 15 years

  5. THE CLASSIC SWAP • 2. Types • a. Coupon swap • b. Basis swap • 3. Usage: • to reduce risk potential and costs.

  6. THE CURRENCY SWAP • B. Currency Swaps • 1. Definition • two parties exchange foreign-currency- • denominated debt at periodic intervals. • 2. Purpose: similar to parallel loan

  7. THE CURRENCY SWAP • 3. Differences of a Currency Swap: • a. Currency swap is not a loan • b. No interest expense; no balance sheet entry • c. The right to offset any non- payment is more firmly establish

  8. THE CURRENCY SWAP • 4. Similarities between Interest Rate and • Currency Swaps • a. Avoid exchange rate risk • b. Exchange rate is only a reference to • determine amounts exchanged • 5. Economic Benefits of Swaps • when arbitrage prohibited, they provide • long-term financing.

  9. INTEREST RATE FORWARDS AND FUTURES • Forward and futures contracts: • - three types used to manage interest rate risk • A. Forward forwards • B. Forward rate agreements • C. Eurodollar futures

  10. INTEREST RATE FORWARDS AND FUTURES • Forward forwards • 1. a contract that fixes an interest rate today on a future loan or deposit. • 2. Contract conditions: • - specific interest rate • - principal amount of future loan • - start and ending dates of future • interest rate period

  11. INTEREST RATE FORWARDS AND FUTURES • Forward rate agreements (FRAs) • 1. cash-settled, • 2. over-the-counter forward contract 3. company fixes an interest rate • applied to a specified future interest period on a notional amount.

  12. INTEREST RATE FORWARDS AND FUTURES • Eurodollar Futures • 1. a cash-settled futures contract for • a 3-month eurodollar deposit • paying LIBOR • 2. Contracts traded on: • a. Chicago Mercantile Exchange • b. London International Financial Futures Exchange • c. Singapore International Monetary Exchange

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