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Definition: LIBOR-In-Arrears Swap
In this kind of swap the interest rate is derived from that particular date’s interest rate rather than previous payment date’s interest rate. A Swap is a tool by which one can exchange their securities with other mostly to handle issues like maturity mismatch, change in investment objectives or quality issues.
In a LIBOR-in-arrears swap the interest rates to be paid are derived from the LIBOR on the maturity. Where as in case of a regular LIBOR swap interest rates are determined at the beginning of the period. LIBOR-in-arrears swap is also known as Swap-in-arrears, In-arrears-swap. Reset swap etc.
LIBOR (London Interbank Offered Rate) is the rate at which European banks can borrow funds from other banks. Among the short-term interest benchmarks LIBOR is most widely used in the world. Reset swap were first introduced in 1980s. This gave the investors an opportunity to make money from potentially falling interest rates. So this tool ere used by those investors who predicted that the future interest rates would fall.