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ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang
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1
P4 Chapter 20 Content
Caps, floors and collars
2 Interest rate swaps
3 Using the yield curve and FRA rates
to set swap rates
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1.Caps, floors and collars
Test your understanding
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1.Caps, floors and collars
Test your understanding
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1.Caps, floors and collars
Test your understanding
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2. Interest rate swaps
Introduction
• An interest rate swap is an agreement whereby the parties agree
to swap a floating stream of interest payments for a fixed stream
of interest payments and via versa. There is no exchange of
principal:
• The companies involved are termed "counter-parties"
• Swaps can run for up to 30 years
• Swaps can be used to hedge against an adverse movement in
interest rates. Say a company has a$200m floating loan and the
treasurer believes that interest rates are likely to rise over the
next five years. He could enter into a five-year swap with a
counter party to swap into a fixed rate of interest for the next five
years. From year six onwards, the company will once again paya
a floating rate of interest.
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2. Interest rate swaps
Introduction
• A swap can be used to obtain cheaper finance. A swap should
result in a company being able to borrow what they want at a
better rate under a swap arrangement, than borrowing it directly
themselves.
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2. Interest rate swaps
Calculations based on splitting gains
• The precise details of the swap arrangement will depend on how
the potential gains are split between the two counter-parties.
• Illustration : interest rate swap
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2. Interest rate swaps
Calculations based on splitting gains
• Illustration : interest rate swap
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2. Interest rate swaps
Calculations based on splitting gains
• Illustration : interest rate swap
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2. Interest rate swaps
Calculations based on splitting gains
• Illustration : interest rate swap
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2. Interest rate swaps
Calculations involving quoted rates from intermediaries
• In practice a bank normally arranges the swap and will quote the
following:
• The"ask rate" at which the bank is willing to receive a fixed
interest cash flow stram in exchange for paying LIBOR
• The "bid rate" that they are willing to pay in exchange for
receiving LIBOR
• The difference between these gives the bank's profit margin
and is usually at least 2 basis points
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2. Interest rate swaps
Illustration: interest rate swap via an intermediary
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2. Interest rate swaps
Illustration: interest rate swap via an intermediary
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2. Interest rate swaps
Test your understanding: interest rate swap via an intermediary
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2. Interest rate swaps
Test your understanding: interest rate swap via an intermediary
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2. Interest rate swaps
Test your understanding: interest rate swap via an intermediary
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2. Interest rate swaps
Further swap example
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2. Interest rate swaps
Further swap example
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2. Interest rate swaps
Further swap example
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3.Using the yield curve and FRA rates to set swap ra
tes
In the examples of swap agreements above, the bank agreed to
pay a fixed stream of payments to a company in exchange for a
variable stream of payments made by the company to the bank (or
vice versa)
The bank decides what the fixed payment should be by analysing
the company's yield curve
The key consideration is that at the inception of the swap:
PV of the variable rate payments = PV of the fixed rate payment
When both are discounted at the spot yield.
Notice how, in the illustration below, the calculated swap rate
payment based on the forward interest rates/FRA rates (calculated
earlier in this chapter). This is because the forward rates are our
best estimate of what the actual interest rates might be in the
future.
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3.Using the yield curve and FRA rates to set swap ra
tes
Illustration
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3.Using the yield curve and FRA rates to set swap ra
tes
Illustration
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3.Using the yield curve and FRA rates to set swap ra
tes
Illustration
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3.Using the yield curve and FRA rates to set swap ra
tes
Illustration
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3.Using the yield curve and FRA rates to set swap ra
tes
Options over swaps
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3.Using the yield curve and FRA rates to set swap ra
tes
Summary of terminology
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