Swap


The swap is an agreement between two parties to exchange interest cash flows (fixed/floating, floating/floating, fixed / fixed), based on a notional principal amount for a certain period of time.

A payer swap is a swap, where the customer pays fixed and receives floating interest. It can be used to hedge interest rate risk of a loan with a floating interest rate.

  • Receiver of the floating money market rate (e.g. 3-M Euribor or EONIA)
  • Payment of the agreed fixed swap rate
No participation in falling money market rates

 

Example:

Underlying transaction: Floating rate loan based on 3M-Euribor (plus credit margin)

Swap

Interest rate hedge payer swap

Swap

   Financing costs: Fixed swap rate + credit margin (synthetic fixed rate loan)


Swap

Please click on the picture for a larger image

 

The swap agreement can be customized to meet your needs and those of the underlying transaction::

  • Notional and currency
  • Reference Rate
  • Term
  • Interest Rate
  • Amortizing Structure
  • Rollover Dates
  • There is no exchange of capital.

During the term of the swap the underlying market value can fluctuate. In the event of early termination of the contract, the payer swap can result in a negative (similar to a prepayment penalty on a fixed-rate loan) or a positive market value.