International Finance Questions Assignment Example | Topics and Well Written Essays - 2250 words

International Finance Questions - Assignment Example Interest rate swaps are over the counter (private) transactions; and they are highly liquid financial derivatives that can be used by hedgers to manage both their fixed and floating assets and liabilities. A party that pay fixed rate is referred to as the payer and the receiving party is called the receiver. For example, X agrees to pay fixed rate of interest under specified time intervals to W and in return, X receives variable or floating interest on notional principle from W. The types of currency swaps include fixed for floating swap for same currency, fixed for floating rate for different currencies, floating for floating swap for same currency, floating for floating rate for different currencies and fixed for fixed rate swap for different currencies. Currency swap refers to a foreign-exchange currency agreement entered into by two parties in relation to principal alone or with interest for payment of a specified loan sum in one currency for an equivalent principle and interest of a specified loan sum in another currency (Shamah, 2003). Payments are made periodically and at maturity or termination of the contract, the principal amounts are re-exchanged. Currency swaps are over the counter financial instruments. Foreign currency swaps are long term because they involve high costs associated with finding counterparty. Currency swap are further divided into two. Principle only currency swap and principal plus interest currency swap. Principle only currency swap is appropriate for contract that are up to ten years and involves exchange of principle with another party in a specific time in future at a rate agreed at the present. It is used to secure cheap loan and reduce exposure to exchange rate fluctuations. Principal plus interest currency swap considers both principal and interest payments. In currency swap, principal is exchanged on national amounts at market rates, often using the same rate for the transfer at inception and at maturity. Credit default swa ps refers to contracts between two parties, where one who buys credit default swap, pays a seller and receives a payoff if loan is defaulted.