What is Swap

Swap is one of the derivatives are useful to prevent financial risks in the company. Generally, swap to hedge interest rate and foreign exchange or currency.

Swap is an agreement between one company and another company. Companies can exchange such as debt obligations with another firm. Example: Company A has a debt with floating interest while company B has a debt with fixed interest. Company A was too risky if you always pay the debt in floating rate while company B also felt uncomfortable with Company A will bear the company’s debt B B and vice versa companies bear the company’s debt B. The two companies will establish a debt that will be included in the contracts and within a specified period.

Of course, both companies will calculate all the risks they bear. Both companies hope that they will benefit from this swap transaction. Therefore, it is very difficult to swap transactions occur in the absence of the two companies agreed.

Swaps can also be used to hedge foreign currency. For example, Takur Corp, an Indian company which is domiciled in Brazil, would like to exchange foreign currency debt with Rudolfo, Corp, a Brazilian company in India. With futures contracts, Mr. Takur no longer need to buy pesos to pay its debts in Brazil, but enough to pay the debt Mr. Alfredo in India. Instead Mr. Rudolfo also does not need to buy the rupee. With the swap, Mr. Takur means borrowed peso, while Mr. Rudolfo borrow money in Rupees.

How the Contract is set?

Not easy to find parties who will want to do a contract with the company. Companies should look for another company (counterpart) that would establish a contract.

If no company would be willing to perform the contract, it cannot be done.

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