Performance Index Paper (PIP)

What is Performance Index Paper (PIP)?

Performance Index Paper (PIP) is short-term commercial paper where the interest rate is named and paid in a currency whose value changes with the value of another currency.

Understanding Performance Index Paper (PIP)

Performance index paper interest rates are determined by the exchange rate of the base currency with a counter currency. PIPs are structured products that can be tailored to meet the specific requirements of a company, albeit the base limits generally are high.

Performance index paper is a commercial-paper variation of the cross currency swap and can be utilized to hedge currency risk. For instance, a large U.S. exporter worried about a plunge in the value of the Euro versus the USD could utilize a PIP that hedges the downside risk of the Euro.

A cross currency swap, likewise called a currency coupon swap or a combined interest rate and currency swap (CIRCUS), has one side that is a fixed rate payment and the other is a floating rate payment. In these swaps, a loan named in one currency and booked at a fixed rate commonly is swapped for a floating rate loan designated in another currency. It ordinarily is employed where the two currencies don't have active swap markets.

Companies and institutions utilize cross currency swaps to hedge currency and interest rate risk, and to match cash flows from assets and liabilities. They are great for hedging loan transactions on the grounds that the swap terms can match the underlying loan boundaries. The transactions normally include two counterparties and the financial institution that works with it. Multinational corporations utilize such instruments to take speculative positions and as hedges, particularly in currencies that don't have liquid swap markets. Currency and interest rate movement in the two currencies and countries would influence swaps results.

Other Related Swaps

An essential foreign currency swap is an agreement to exchange currency between two gatherings. Principal and interest payments on a loan made in one currency are swapped for principal and interest payments of a loan of equivalent value in an alternate currency. The Federal Reserve System (FRS) offered such swaps to several agricultural nations in 2008 at the hour of The Great Recession.

The World Bank originally presented currency swaps in 1981. Such swaps can be made on loans with maturities as long as 10 years. Currency swaps contrast from interest rate swaps in that they additionally include principal exchanges. In a currency swap, each counterparty keeps on paying interest on the swapped principal sums until the loan develops. Upon maturity, principal sums are exchanged at the initially agreed upon rate, which keeps away from transaction risk at the spot rate.

Highlights

• Performance index paper interest rates are determined by the exchange rate of the base currency with a counter currency.
• Performance index paper is a commercial-paper variation of the cross currency swap and can be utilized to hedge currency risk.
• Performance Index Paper (PIP) is short-term commercial paper where the interest rate is named and paid in a currency whose value changes with the value of another currency.