Interest Rate Swaps Will Increase After Dodd-Frank!

June 19, 2012 by  Filed under: Marketing 

What are interest rate swaps? Some people are not familiar with this method. An interest rate swap is a contract agreement between two firms where both firms agree to make payments to one another for a specified amount of time that they have agreed on. This time period is usually based upon an amount of interest. It is where one future interest payment is swapped for another. These swaps are usually done by firms that are looking for a structured type of interest rate provided by other firms inexpensively.

There are a lot of benefits that come with these types of swaps. By combining their costs, both firms can decrease their costs which is very beneficial for both parties. These swaps have become a very important and useful tool to many investors. Most investors use this method to manage risk. One common form of an interest rate swap is known as vanilla swap. This is a form that allows a firm to exchange fixed rate payments for adjustable rate payments. This form of swap is based on LIBOR which is known as the London Inter-bank Offered Rate which handles floating short-term rates that are set daily.

These swaps are becoming more popular and they provide exposure to the interest rate markets. Another good thing about these swaps are that they allow firms to swap and convert their debt to floating rate without putting out any cash. These swaps allow these firms to match their liabilities to their income. Many banks and insurance companies believe that when firms swap these rates, it lowers interest rates on bonds that are usually sold for public projects such as bridges and schools. These agreements were entered into with the primary reason of lowering rates and helping the borrower to receive a variable rate in return. When these transactions occur, they generate revenue. These swaps are composing fully 82% of the derivatives trade. Many banks have made great profits from this kind of transaction. It is said to be known that JP Morgan Chase have made 1.4 billion dollars in revenue just by trading and swapping on interest rates. This is a popular trend that seems to be getting more popular as more firms are realizing how they can not only save money, but make money as well. Cash flows on a four-year vanilla swap can be worth millions of dollars. Vanilla swaps have fixed rates which are known as swap rates which can also be very beneficial to all parties involved. Swapping these rates will be around for a long time.

If you are dealing with interest rate swaps, you need to stay up to date with the latest information; our website has many articles of interest in this area.

Article Source:

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

You must be logged in to post a comment.

Prev Post:
Next Post: