This document summarizes different types of swap contracts. It begins with an overview of interest rate swaps, including how they allow entities to exchange fixed and variable rate financing. It then describes currency swaps, commodity swaps, credit default swaps, and equity swaps. For each type, it provides a definition and example to illustrate how the swap works. The presentation was given by Paulo Martins and Vilma Jordão to explain the role of swap contracts and how they can help companies manage financial risks.

1. Financing: fixed and variable rates.
The role of swap contracts.
Presentation by:
•
Paulo Martins 65929
METI
19 Novembro 2013
•
Vilma Jordão 59056
MEIC

2. Swaps
• Has Grown alot in the past 20 years
• Protection from financial risks
• Balancing operational costs
• Financing in moments of low market liquidity

3. Swap Dealer
• Swap contracts aren’t made with well defined rules.
• There is always some entity in the midle called Swap
Dealer.

4. Types of Swaps
• Interest Rate Swaps
• Currency Swaps
• Comodity Swaps
• Credit Default Swaps
• Equity Swaps

5. Interest Rate Swaps
• In this kind of swap there is an exchange between fixed and
variable interest rates.
• It implies a great risk and results in great losses for one of
the parts.
• One of the parts pays the difference between the fixed and
the variable interest rate.

6. Interest Rate Swaps - Example
Two entities (α and β) need funding.
• α wishes to get financed with a variable interest rate.
• β wishes to get financed with a fixes interest rate.

7. Interest Rate Swaps - Example
Rates offered to company α and β
Fixed rates
Variable rates
Company α
6%
Euribor 3 months + 1.25%
Company β
7%
Euribor 3 months + 1.50%
α gets a loan of 10 m€, at a fixed rate of 6%, for 10 years;
β gets a loan of 10 m€, at the variable rate Euribor 3 months + 1.5%,
for 10 years.

8. Interest Rate Swaps - Example
1. α will have a loan at a variable rate, as wished, with a rate of:
Euribor 3months + (6%-5.25%) = Euribor 3month + 0.75%
2. β will have a loan at a fixed rate, with a rate of:
5.25%+(Euribor 3months+1.5%)-Euribor 3 months = 6.75%

9. Interest Rate Swaps - Example
If α had a loan at a variable rate, it would pay Euribor 3months +
1.25%, meaning a profit of 0.5%;
If β had a loan at a fixed rate, it would pay 7%, meaning a profit of
0.25%.
Taxa
Valor Juro
Empresa α
4.5%
€ 450 000
Empresa β
5.25%
€ 525 000

10. Currency Swaps
This kind of swap consists on the deal between two entities, in
the exchange for the obligations of a loan in one currency for
another loan obligations of equal net value in another
currency.

11. Currency Swaps - Types
• FX-Swaps
• Back-to-back
• Cross currency swaps

12. Currency Swaps - Example
1M
1.4M

13. Currency Swaps - Example

14. Commodity Swaps
The buyer and the seller both accept to exchange periodic
payments, one with a fixed value and the other with a
variable value, calculated over a predeterminated
commodity amount

15. Commodity Swaps – Advantages and Goals
• Allow to establish a limit to the volatility of the
commodity prices
• This way the raw material price stays immune to the
market price flutuations

16. Commodity Swaps - Example

17. Credit Default Swaps
CDS Seller
CDS Buyer

18. Credit Default Swaps

19. Credit Default Swaps
-38.600€ x 4
+49.200€ x 3
+1,049.200€
-1.000.000€
CDS Seller
CDS Buyer
1.000.000€ - Valor actual das obrigações
42.900€

20. Equity Swaps
In an equity swap, two parties agree to exchange a set of
future cash flows periodically for a specified period of time.

21. Equity Swaps - Example
•
•
•
•
•
Notional Principal: $100 million
Alpha Fund pays: Total returns on the S&P 500 Index
Goldman Sachs pays: Fixed 6%
Swap maturity: 3 years
Payments to be made at the end of every six
months, that is, 30th June and 31st December

22. Equity Swaps - Example
Let’s see how the cash flows turn out in the first year.
At the beginning, the S&P Total Return Index was at 2500 level, on 30th June it was 2600, and on
31st December it was at 2570.
Alpha Pays
Return on index = 2600/2500 = 4%
30th June
31st December
= 100,000,000*0.04
= $4,000,000
Goldman Pays
=100,000,000 * 182/365 * 6%
=$2,991,780
Fixed payment
=100,000,000 * 183/365 * 6%
Return on index = 2570/2600 = - =$3,008,219
Floating payment
1.154%
= 100,000,000*0.01154
= $1,154,000
Total payment
Alpha pays nothing.
= $3,008,219+$1,154,000
=$4,162,219

23. Thank You
Questions?