A foundation course that explains the various types of currency and basis swap. This includes how they work, the risks and their importance in pricing hedging transactions.

It is suitable for those working in or around financial markets who need to know more.

There are simple examples with time for questions and answers.

This course is only available in-house and is suitable for up to 12 people.

This is what is covered:

- Back-to-back lending in different currencies
- Fixed - fixed currency swaps
- Fixed – floating currency swaps
- Floating – floating currency swaps
- The exchange of principal – when and at what rate
- Currency swaps and counterparty credit risk
- Basis swaps – what they are and how they work
- Examples of basis swaps
- Why basis risk matters – windfall gains and losses
- How basis swaps are used in hedging
- How the price of basis swaps needs to be factored into hedging transactions
- Examples from the bond and forward foreign exchange markets

Learn about the following: What a currency basis swap is. How currency basis swaps work. How to read the price quotation. How these swaps influence the price of other deals.

Learn about the following: What currency swaps are. How currency swaps can be used. How currency swaps are priced. The risks that currency swaps can produce.

11th August 2014

A currency swap is really like a back-to-loan. This is where one party lends one currency and borrows another. During the life of the swap interest is paid and received on the currencies borrowed and lent. On maturity there is repayment. The first transactions were in the 1970s where two companies exchanged their domestic currencies in order to borrow foreign currency often at an attractive interest rate. Initially banks earned fees for arranging these deals but soon realised that they could act as a counterparty hedging the transactions through the evolving foreign exchange market.

11th August 2014

A basis is swap is an interest rate or currency swap where both the payment of interest and receipt of interest are on a variable or floating rate basis. Let’s see three examples:

20th September 2009

When two parties agree to enter an interest rate swap (IRS) one party pays a fixed rate of interest and the other a variable rate. The variable rate is often referenced to Libor or Euribor. The interest payments are based on a notional amount, (with IRS no principal amount changes hands). In the market there are conventions for calculating the interest payments. For example USD IRS use an annual actual 360 interest rate calculation for the fixed payment and a quarterly or semi annual actual 360 calculation for the floating payment. Maturities are normally between 2 and 20 years but it is possible to trade swaps that have maturities exceeding 50 years. Customers using swaps to hedge can expect a dealer to quote a dealing spread. The dealer will want to receive a higher fixed rate than the one they pay. It's one way the dealer makes money from trading. Dealers will insist before trading that the appropriate documentation is signed. For swaps standard documentation is provided by the International Swaps and Derivatives Association (ISDA). This document is called a master agreement. It covers all swaps between the two parties. Individual transactions are then agreed by confirmation which refers to the master agreement.