Fixed for Floating Swap

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Definition: Fixed for Floating Swap

It is a type of interest rate swap in which there is a contract to exchange fixed payments in return for floating payments connected to an interest rate, and is usually used to manage exposure to fluctuations in the interest rates.

For both parties, the value of any interest rate swap is the net difference between the present value of cash flows one party is expecting to receive and the present value of payments the other party is expecting to make. At the beginning of the contract, the value for each party is generally zero because no cash flows had been exchanged at that point. During the life of the contract, it is a zero-sum game. As interest rates vary, the value of the swap generates a profit on one counterparty's books, that results in an equivalent loss on the other's books.The swap transactions are often enabled by a swap dealer, who acts as the required counterparty for a specified fee.

For example: A portfolio manager with a Rs1 lakh fixed-rate portfolio yielding 4.5% believes rates may increase and wishes to decrease his exposure. He can move into an interest rate swap and exchange his fixed rate cash flows for floating rate that have less exposure when rates are increasing. He swaps his 4.5% fixed-rate interest cash flows for the three-month floating LIBOR rate (currently at 4%). After the swap contract, he will start receiving a floating rate payment and start paying a fixed rate that is corresponding to the rate the portfolio is receiving, converting his portfolio into a floating-rate portfolio instead of the fixed-rate stream he was receiving. No exchange of the principal amounts takes place and the interest payments are usually netted against one another.


Hence, this concludes the definition of Fixed for Floating Swap along with its overview.

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