Rollercoaster Swap
What Is a Rollercoaster Swap?
A rollercoaster swap is a seasonal interest rate swap where the payments can be adjusted to best meet the counterparty's cyclical financing needs.
Figuring out Rollercoaster Swaps
A rollercoaster swap has fluctuating, or adjustable, payment terms with the goal that each counterparty can match cash flows to transfers, periodic financing obligations, or seasonal factors. The benefit of a rollercoaster swap lies in the way that it is a seasonal swap. This permits the counterparty to fit the payment streams to meet their financing needs consistently, which can be vital when sales incomes alone are not adequate to meet these requirements.
An international company that sells lawnmowers, for instance, could have a distinct fascination with a rollercoaster swap since it can match swap payments with the seasonal demand for lawnmowers, which emerges essentially in the late spring and disappears in the colder time of year. Moreover, a dress company that specializes in ski wear and winter garments would face the contrary seasonal variances and may like to as needs be match its cash flows.
Not at all like customary interest rate swaps, a rollercoaster swap permits the time between normal payments (known as the swap's tenor) to be extended or abbreviated to match seasonally-fluctuating cash flows. Furthermore, the size of the notional amount is adjustable, albeit the net present value (NPV) of the transaction stays unchanged.
Special Considerations
A rollercoaster swap permits a firm to roll unrealized profits or losses forward or backward. In this way, due to accounting and taxation suggestions, many banks keep up with special endorsements, rules, and limits for the utilization of such products, and that means that these products may not be proper and additionally accessible for all users. Independent tax and accounting counsel ought to be looked for before utilizing them.
The rollercoaster swap is otherwise called an accordion swap, concertina swap (commonly in reference to currency swaps), or NPV swap.
Illustration of a Rollercoaster Swap
Here is a more substantial model: A company has a $100 million compensation fixed swap on its books, with a last maturity in seven years at a rate of 8.00%. The current seven-year swap rate is 8.75%, so the swap is in-the-cash (ITM) by 75 basis points (BPS) each year. Utilizing a rollercoaster swap, there are several changes that the firm can execute. It may, for example:
- Abbreviate the swap to three years, and increase the size to $260 million, keeping up with the rate of 8.00%, below the three-year rate of 9.10%
- Abbreviate the swap to three years, and increase the size to $350 million, and furthermore increase the rate to 8.25%
- Protract the swap to 10 years, keep up with the size at $100 million, yet reduce the rate to 7.75%, below the 10-year rate of 8.25%
The important point is that the net present value of the swap before and after the changes must continue as before, accordingly the scope of conceivable outcomes are various yet, simultaneously, are obliged by the original NPV.
Features
- A rollercoaster swap includes a flexible payment schedule to smooth cyclical or seasonal financing needs.
- A rollercoaster swap permits the time (tenor) between standard payments to be extended or abbreviated to match seasonally fluctuating cash flows.
- The size of a rollercoaster swap's notional amount is adjustable, albeit the net present value (NPV) of the transaction stays unchanged.
- The rollercoaster swap is otherwise called an accordion swap, concertina swap, or NPV swap.
- A firm can utilize a rollercoaster swap to roll unrealized profits or losses forward or backward.
