📚 node [[financial solutions interest rate swaps]]

Financial solutions - Interest rate swaps

Go back to the [[Risk Management Main Page]]

Financial swaps swap a risk with someone else.

Most common are interest rate swaps.

Almost every company uses or considers using them re: their debt payments.

Corporate Debt

  1. Company-specific interest rate

  2. #LIBOR - London Inter-Bank Offer Rate

  3. Each company has it's own interest rate

  4. LIBOR floats and changes based on the Fed/central bank rate

    1. Variable rates
    2. Floating rates

Company's rate = Libor+ - LIBOR + Company Specific rate

LIBOR is usually just above the cash rate

Interest swaps swaps out the floating interest rate.

You buy a slightly higher interest rate for 5 years to make sure you're covered if the LIBOR rate climbs above the rate you bought the swap at.

eg. LIBOR --> 1% .: Buy 5-year swap @2% then LUBOR --> 3% .: you still pay 2%

Typical to lose money up front but you're hedged against big swings up.

Company can still lose money if the LIBOR rate falls instead of rises after buying the swap.

📖 stoas
⥱ context