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Financing: fixed and variable ratThe role of swap contracts.

19 Novembro 2013

Presentation by:

Paulo Martins 65929 METI

Antnio Junior 57699

Vilma

Antn

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Swaps

Has Grown alot in the past 20 years

Protection from financial risks

Balancing operational costs

Financing in moments of low market liquidity

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Swap Dealer

Swap contracts arentmade with well defined ru

There is always some entity in the midle called S

Dealer.

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Types of Swaps

Interest Rate Swaps

Currency Swaps

Comodity Swaps

Credit Default Swaps

Equity Swaps

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Interest Rate Swaps

In this kind of swap there is an exchange between fixvariable interest rates.

It implies a great risk and results in great losses for othe parts.

One of the parts pays the difference between the fixthe variable interest rate.

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Interest Rate Swaps - Example

Two entities (and)need funding.

wishes to get financed with a variable interest rate.

wishes to get financed with a fixes interest rate.

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Interest Rate Swaps - Example

Fixed rates Variable rate

Company 6% Euribor 3 months +

Company 7% Euribor 3 months +

gets a loan of 10 m, at a fixed rate of 6%, for 10 years;

gets a loan of 10 m, at the variable rate Euribor 3 mont

for 10 years.

Rates offered to company and

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Interest Rate Swaps - Example

1. will have a loan at a variable rate, as wished, with a rate of:

Euribor 3months + (6%-5.25%) = Euribor 3month + 0.75%

2. will have a loan at a fixed rate, with a rate of:

5.25%+(Euribor 3months+1.5%)-Euribor 3 months = 6.75%

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Interest Rate Swaps - Example

If had a loan at a variable rate, it would pay Euribor 3

1.25%, meaning a profit of 0.5%;

If had a loan at a fixed rate, it would pay 7%, meaning a

0.25%.

Taxa Valor Juro

Empresa 4.5% 450 000

Empresa 5.25% 525 000

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Currency Swaps

This kind of swap consists on the deal between two e

the exchange for the obligations of a loan in one cur

another loan obligations of equal net value in

currency.

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Currency Swaps - Types

FX-Swaps

Back-to-back

Cross currency swaps

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Currency Swaps - Example

1M

1.4M

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Currency Swaps - Example

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Commodity Swaps

The buyer and the seller both accept to exchange payments, one with a fixed value and the othevariable value, calculated over a predetercommodity amount

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Commodity Swaps Advantages and Goals

Allow to establish a limit to the volatility of thecommodity prices

This way the raw material price stays immune tomarket price flutuations

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Credit Default Swaps

CDS Seller CDS Buyer

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Credit Default Swaps

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Credit Default Swaps

CDS Seller CDS Buyer

-1.000.000+49.200x 3+1,049.200

-38.600x 4

1.000.000- Valor actual das obrigaes

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Equity Swaps

In an equity swap, two parties agree to exchange a se

future cash flows periodically for a specified period of

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Equity Swaps - Example

Notional Principal:$100 million Alpha Fund pays:Total returns on the S&P 500 Goldman Sachs pays:Fixed 6% Swap maturity: 3 years Payments to be made at the end of every six mo

that is, 30thJune and 31stDecember

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Equity Swaps - Example

Alpha Pays Goldma

30th June

Return on index = 2600/2500 = 4%

= 100,000,000*0.04= $4,000,000

=100,000,000 * 182

=$2,991,780

31st December

Return on index = 2570/2600 = -

1.154%

Alpha pays nothing.

Fixed payment=100,000,000 * 183

=$3,008,219

Floating payment= 100,000,000*0.01

= $1,154,000Total payment

= $3,008,219+$1,1

=$4,162,219

Lets 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 30thJune it was 2600,

31stDecember it was at 2570.

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Thank You Questio