A swap is in essence an exchange of cash flows. \u00a0A swap involving a return on a based interest rate such as the Euribor as against the return on equity portfolio is an equity swap. A speculator may bet that one exchange of cash flow will work in his favour. For example, a speculator may enter a swap with a financial institution to receive a return which it would have received on paying floating rate interest as against the return on a particular \u00a0market.<\/p>\n
The return will be calculated by reference to a notional amount of capital and a notional investment of money in the market.\u00a0 This would be equivalent to borrowing at the interest rate and investing in these shares without actually acquiring the underlying asset.\u00a0 The net amount will be paid to the person with the profitable position.<\/p>\n
More complex products may involve baskets of currencies and stocks as the variable payment, in exchange for fixed rate interest payments linked to an underlying cost of funds. These techniques replicate the effect of investment in portfolios across ranges of market. One of the parties, usually the seller will act as a calculation agent.<\/p>\n
Currency swaps are commonly used so, by which parties exchange amounts in one currency for another or speculate against different exchange or interest rates in currencies. In a currency swap, the parties agree to pay each other, \u00a0the interest rate that would have been paid on the money markets in the two different currencies.\u00a0 Some currency swaps involve the actual delivery of currency.<\/p>\n
Swaps in essence constitute obligations to make a series of future payments.\u00a0 By providing that each payment is separate, the risk of insolvency at a future date is reduced as each transaction is completed as it is paid. This means that in the event of insolvency each future payment is considered rather than the insolvency applying to the entire contract, which would increase the insolvency risk.<\/p>\n
Credit derivatives seek to provide protection against defaults in future payments.\u00a0 The credit derivative provides a return calculated by reference to the credit performance of another entity.\u00a0 The credit derivatives may, for example, pay a shortfall on a future payment in the event of a default.<\/p>\n
A speculator may purchase to position whether or not he\/ it owns the underlying assets.\u00a0 It is effectively speculating on whether the entity may default on payment.\u00a0 The degree of default required for payment will depend on the terms of the agreement.\u00a0 It may be triggered by a downgrade or change in the net present value of the reference entity due to a restructuring.<\/p>\n\n
\n <\/div>\n\n","protected":false},"excerpt":{"rendered":"
Nature of Derivatives Derivatives are financial products or assets whose value is indirectly derived from an underlying product or asset.\u00a0 The main types of financial derivatives are swaps, options, and futures.\u00a0 Swaps involve one party exchanging an obligation for another.\u00a0 Interest rates and r currencies are commonly the subject of swaps. Options entitle a buyer […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[168],"tags":[],"_links":{"self":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/12904"}],"collection":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/comments?post=12904"}],"version-history":[{"count":4,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/12904\/revisions"}],"predecessor-version":[{"id":31806,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/12904\/revisions\/31806"}],"wp:attachment":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/media?parent=12904"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/categories?post=12904"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/tags?post=12904"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}