Fixed Price

What Is Fixed Price?

Fixed price can allude to a leg of a swap where the payments depend on a steady interest rate, or it can allude to a negotiated price point that isn't subject to change under normal conditions.

Figuring out Fixed Price

Fixed price generally has two implications. It can allude to the fixed payment leg of a swap or a contract with a fixed negotiated-upon price that isn't allowed to differ except if there are certain predefined, uncontrollable issues at hand.

Swaps

A interest rate swap is a type of financial contract that allows one party to pay (or receive) a fixed interest payment on some underlying notional amount, while the other receives (or pays) a variable interest rate on a similar underlying amount. These swaps might be placed for several reasons, for example, changing over an existing fixed-rate payment into a variable rate payment (or vice versa), to hedge against specific interest rate risks, or to estimate on the future course of interest rates.

A normal interest rate swap is, generally, a fixed-for-floating swap. The fixed price leg of a swap is one that depends on a constant interest rate, while the floating price leg is calculated utilizing variable interest rates. There can likewise be a fixed-for-fixed swap, which is in an exchange between two currencies where the two legs carry a fixed interest rate.

Numerous currency swaps, which include the receipt and re-conveyance of a predetermined amount of foreign currency in exchange for another, carry two fixed price legs since investors are in many cases looking to hedge foreign currency risk and don't have any desire to open themselves to extra interest rate risk.

One of the most common types of interest rate swaps is the plain vanilla interest rate swap. This involves an exchange of two surges of cash flows, which are both in view of a similar amount of notional principal. Notwithstanding, one stream pays interest on that notional principal at a fixed rate (or fixed price) and different pays interest on the notional principal at a floating, or variable rate.

The fixed price leg conveys a fixed-rate stream of cash flows that doesn't change for the duration of the swap, while the floating (variable) rate stream changes occasionally over the duration of the swap as its benchmark interest rate changes as per market conditions. Two gatherings, called counterparties, go into such transactions to reduce their exposure to changes in interest rates or to endeavor to profit from changes in interest rates.

Basically, the fixed price leg freezes the cash flows connected to some underlying value at a fixed rate for the life of the contract. If a trader, or firm, accepts that interest rates are low (say at 1.50%) and will rise from now on, they might enter a swap as the pay-the-fixed/receive-the-floating counterparty so they will keep on paying just 1.50% even assuming interest rates rise. In like manner, a trader, or firm, who feels that interest rates are high (say at 6%) and are probably going to fall might enter a swap as the receive-the-fixed/pay-the-floating counterparty so they will in any case receive 6% even in the event that interest rates decline.

Fixed Price Contract

A contract is supposed to be a fixed price contract if the negotiated upon price isn't allowed to change except if there are certain predefined and special conditions.

This is generally done so the costs included can be estimated with a reasonable amount of certainty. While this may be profitable to one of the counterparties, an increase in costs would represent a risk to the next counterparty.

Highlights

• A contract is supposed to be a fixed price contract if the negotiated upon price isn't allowed to change except if there are certain, predefined, special conditions.
• The fixed price leg of a swap is one that depends on a perpetual interest rate, while the floating price leg is calculated utilizing variable interest rates.
• Fixed price can allude to a leg of a swap where the payments depend on a steady interest rate, or it can allude to a negotiated price point that isn't subject to change under normal conditions.