Fixed-for-Floating Swap
What Is a Fixed-for-Floating Swap?
A fixed-for-floating swap is a contractual arrangement between two gatherings wherein one party swaps the interest cash flows of fixed-rate loan(s) with those of floating-rate loan(s) held by another party. The principal of the underlying loans isn't exchanged.
Understanding Fixed-for-Floating Swap
There are a couple of principal inspirations for a loan holder to execute a fixed-for-floating swap:
- Reduce interest expense by swapping for a floating rate on the off chance that it is lower than the fixed-rate as of now being paid;
- Better match assets and liabilities that are sensitive to interest rate developments;
- Enhance risks in a total loan portfolio by trading a portion of a fixed rate to floating rate; as well as
- Perform a financial hedge with an expectation that market interest rates will decline.
Illustration of a Fixed-for-Floating Swap
Assume Company X conveys a $100 million loan at a fixed rate of 6.5%. Company X expects that the overall heading of interest rates over the close or middle of the road term is down. Company Y, carrying a $100 million loan at London Interbank Offered Rate (LIBOR) + 3.50% (floating rate loan), has the contrary view; it accepts interest rates are on the rise. Company X and Company Y wish to swap. With the fixed-for-floating swap Company X will pay the floating rate, and subsequently benefit on the off chance that interest rates drop, and Company Y will expect payments for the fixed-rate loan. Company Y will remain to benefit assuming that interest rates rise. Swap transactions are worked with by a swap dealer, who will act as the required counterparty for a fee.
Features
- A fixed-for-floating swap happens when one party swaps the interest cash flow of a fixed-rate loan with those of a floating-rate loan held by another party.
- Doing the swap reduces interest expense by swapping for a floating rate on the off chance that it is lower than the fixed-rate at present being paid.
- A fixed-for-floating swap permits you to better match assets and liabilities that are sensitive to interest rate developments.
