Can any one explain the uses of Interest rate swap?

THanks in advance

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Interest rate swap means exchanging the rate of interest with required one.

for eg: Let there are two company CO. 1 and CO. 2

both required fund and went to bank BANK1 and BANK 2 (respectively) to borrow the fund required.

Now Bank 1 give Loan at Fixed rate of Interest

and Bank 2 give loan at Floating rate of Interest

whereas CO.1 required loan at Floating rate of Interest insted of Fixed rate of interest and  CO.2 required loan at Fixed rate of Interest insted of Floating rate of interest

here by mutual agreement between both the company they can exchange their given rate of interet for the required one.

these exchange of rate of interest is known as interest rate swap.

Interest rate swaps are used to hedge against or speculate on changes in interest rates.

Thanks Vinay for your comment.

You have explained the procedure. Can we use it for any other perpose?

what is generic swap or plain vanilla swap?

You r welcome Ishika… Mujhe bahut khusi hui iss bat ki apne hamare comments ko padha……

well Ishika swaping is use to hedge or reduce the probable future risk or loss… its is up to u where u use and  take advantages of it…

rest generic interest rate swap and plain vanilla interest rate swap can be explained as below…

plain vanilla interest rate swap

In a plain vanilla interest rate swap, Co. A and Co. B choose a time frame, a principal amount, a single currency, a fixed interest rate, a floating interest rate and payment dates. On the specified payment dates for the duration of the time frame, co. A pays Co. B a fixed rate of interest on the pricipal amount, and co. B pays co. A a floating interest rate on the principal amount. All payments are made in the same currency and only the net sum of each payment exchanges hands. The purpose of such an exchange might be to reduce interest rate risk.

The generic interest rate swap

The generic interest rate swap is an agreement between two parties to exchange two types of cash flows. The receiver receives a fixed cash flow and pays a cash flow determined by a floating rate for the length of the agreement at fixed intervals.

Ishika there can be many generic types of swaps some of them are interest rate swap, currency  swaps, commodity swaps , equity swaps, etc. explaination of them can be made in these way…

Currency swaps

A currency swap involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency.

Commodity swaps

A commodity swap is an agreement whereby a floating price is exchanged or a fixed price over a specified period.

Equity Swap

An equity swap is a special type of total return swap, where the underlying asset is a stock. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do.

Thanxs Ishika for asking such type of ques as these made me to study otherwise after whole day of articleship its very difficult to study,.....

Interest rate swap is two types:

1. Fixed VS Floating: Fixed vs floating may be Plain Vannila or Generic.

2. Floating Vs Floating: Floating Vs Floating is called Basis swap

[Under Plain Vanilla or generic swap payment of interest on one leg would based on fixed interest rate and another leg would based on floating interest rate.

[Plain vanilla and generic swap are similar on the basis of interest payment. However it differs on the basis of day count convention.

[Day count convention of Generic swap is (30/360). However day count convention of plain vanilla swap is (Actual/360 or 365).

Thanks Nagendra sir and Vinay

good topic

thanks for sharing such awesome topic.

nice one...thanks for sharing

is this actually done in the practical life??Since no bank will correspond to the other bank for such structures.

Thanks!!