Derivatives and Risk Management

chapter 5

Swap Instruments

LEARNING OBJECTIVES

After reading this chapter, you will be able to understand

• the nature of swap contracts
• the types of swap contracts
• swap operations
• the benefits of swap deals to the parties
• the application of swap contracts to various situations

CHAPTER OUTLINE

5.1 Introduction

5.2 Swaps

5.3 Vanilla Swap

5.4 Amortizing Swap

5.5 Forward Swap

5.6 Basis Swap

5.7 Yield Curve Swap

5.8 Constant Maturity Swap

5.9 Rate Differential Swap

5.10 Corridor Swap

THE SITUATION

Amarjyothi Traders had borrowed ₹ 1.5 crore from a bank at a fixed interest rate of 12 per cent p.a. After six months they estimated that the interest rates would fall significantly, which would make their borrowing costly. They approached their bankers ...