If you are dating a person named Libor, you might not want to tell them about this one. He might get the wrong idea.
This transaction is a form of credit swap, so we'll start with the basics there. A credit swap typically involves trading the proceeds of a fixed-rate debt security with the proceeds from a floating-rate one.
The owner of a fixed-rate bond wants a little more action; they want the potential upside of an investment that can move along with interest rates. Meanwhile, on the floating-rate side, they are looking for more stability. They like the idea of knowing for sure what the return will be over the long haul.
So the two sides make a trade. They don't trade the actual holdings. They just trade the money generated from the investments.
Usually, the floating-rate part of this transaction is set at the beginning of the swap period. The LIBOR-in-Arrears version changes the timing of this. The rate gets set at the end of the period instead. Then the rate, once it's set, gets applied retroactively to the time period.
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Finance: What is a swap, and what is a s...49 Views
Finance allah shmoop what is a swap And what is
a swap Shin Um can we just say it's an
option to swap You know like microsoft is a micro
computer software thing or like the electrocution is electricity and
execution or the bromance is you know brother and romance
which is something totally different when dealing with gerbils Anyway
one day a guy was holding a swap turned a
corner wasn't looking where he was going then glam o
he ran into an option What came of it was
a super hybrid type of security were in a slop
like i swap you so many dollars for so many
euros is tacked onto an option You want the ability
to pay off your loan either in us dollars or
in euros assuming they still exist when your loan comes
due That whole brexit thing that issue have the option
to swap the flavor of payments you're making for the
hundred grand You borrowed no it's houses play out well
When the bond was issued one dollar bought you one
euro and the interest rate was eight percent So you
paid eight grand a year to rent that hundred for
ten years at which point you're going to pay it
all off simple but after five years the exchange rates
have drifted massively Magic fairy dust was sprinkled by wizards
all over europe They beat back the thirty two hour
work week Corruption unions and economic misery wrought by not
being able to compete with china russia in africa and
now amazingly the euro is a much stronger currency than
the u s dollar that's kind of a fictional story
here that we'll make enough In fact one euro buys
you two u s dollars like it when the euro
was first put out there So if you holding the
swap shin on the interest payment flavor of the hundred
grand you borrowed if you so choose you can pay
that eight grand in euros that is instead of the
eight thousand dollars a year in interest you can pay
for thousand euros It's almost a ziff your interest rate
was cut in half That's not really it's a value
is the same it's just the number of units were
cut have theirs You know that works And if you
live in europe and work in europe and we're paid
in euros Well it really is like a roman holiday
of interest rates of just want to focus on the
numbers But the values of the same there's No free 00:02:15.938 --> [endTime] lunch here even in swap shen lang
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What is LIBOR? LIBOR is an acronym for the London Interbank Offered Rate. It is the most widely referenced benchmark for short term loans used by f...