Swap Agreements Are Generally Conducted By The

Considering only the next payment, both parties could just as easily have entered into a fixed-term contract for the outstanding futures contract. For subsequent payment, another futures contract whose terms are the same, i.e. the same nominal amount and fixed-for-floating, etc. The swap contract can therefore be considered as a series of futures contracts. In the end, there are two cash flows, one of the party that always pays a fixed rate on the nominal amount, the fixed part of the swap, the other by the party that agreed to pay the variable rate, the variable leg. Apart from Switzerland, the two countries most dependent on central bank foreign exchange swaps are the Netherlands and Germany. In both countries, short-term securities markets are extremely weak, but central banks rarely use foreign exchange swaps because they are more dependent on other open market instruments. In Germany, the Bundesbank has been using foreign exchange swaps since 1958. In the first ten years, it used contract swaps to influence both the domestic money market and stimulate short-term foreign investment through attractive swap rates.

Beginning in the late 1960s, swaps were mainly driven by attempts to calm the international monetary situation and boost confidence in the dollar parity. It is only since 1979 that foreign exchange swaps have been used to “refine” the money market. A swap is a derivative contract in which two parties exchange the cash flows or liabilities of two different financial instruments. Most swaps include cash flows based on fictitious capital such as a loan or loan, although the instrument can be almost anything. In general, the manager does not change ownership. Each cash flow includes a portion of the swap. Cash flows are usually fixed, while the other is variable and is based on a reference rate, a variable exchange rate or an index price. In summary, the use of foreign exchange swaps is in a situation where capital inflows are short-term.

But they also have an expansionary monetary effect that must be sterilized; In the absence of an asset futures market, the central bank must set an exchange rate that can have negative signal effects. If the country is going through a severe crisis, the use of swaps to temporarily increase gross foreign exchange reserves will only delay the necessary adjustment. And above all, if the central bank cannot hedge its position (as in times of speculation against the currency), it can suffer exchange rate losses. In Argentina, these negative effects clearly outweighed profits. However, there are examples of countries (such as Korea) that do not appear to have particularly detrimental effects, so the instrument cannot be clearly considered unsatisfactory. Unlike the parallel credit structure used at the time, the first formal foreign exchange swap was settled by Citicorp International Bank for a 10-year sterling swap in $US $100,000 between Mobil Oil Corporation and General Electric Corporation Ltd (UK). The concept of interest rate swap was developed by the Citicorp International Swap, but cross-interest rate swaps were introduced in 1981 by the World Bank to obtain the Swiss franc and German mark by exchanging cash flows with IBM. This agreement was negotiated by Salomon Brothers for a nominal amount of $210 million and a term of more than ten years.

[9] Generic types of swaps, classified according to their quantitative importance, are interest rate swaps, core swaps, money swaps, inflation swaps, credit risk swaps, commodity swaps and equity swaps. . . .