CandleFocus Glossary Editor
Swap rate is an important aspect in financial derivatives markets and a key component in the pricing of swap contracts. It is the fixed rate given for an obligation to pay a particular floating-rate. The rate that is being exchanged for is called the counter-value. Swap rate is most commonly used for interest rate swaps, commonly quoted as a swap spread, and currency swaps.
An interest rate swap is an agreement between two counterparties to exchange two streams of cash flows based on certain interest rates over an agreed period of time. The two rates being exchanged in the swap are the counter-value rate and the swap rate or fixed rate. The fixed rate is determined by the government or central bank's benchmark rate, such as a treasury yield or the Federal Funds Rate. The floating-rate payment is determined by a given reference rate such as prime rate, Fed Funds Rate, London Interbank Offered Rate (LIBOR) or Eurodollar Futures, among others. The swap rate will often be set as a spread to the counter-party reference rate, giving a net rate that can both move in the same direction or in different directions depending upon the terms and conditions of the agreement.
In a currency swap, two parties agree to exchange two amounts of different currencies where each party pays interest on the currency they owe and receives interest on the currency they own. The currency swap rate is set by the price at which the exchange of two currencies can be made at a given date (in other words, the rate of exchange can be agreed upon). The rate is determined by prevailing market conditions and will depend on a number of factors such as the current supply of and demand for the currencies in question, any ongoing economic policies or agreements between the countries involved and the amount of time involved in the swap. The swap rate is a way of calculating the cost of the exchange and will reflect the difference between the monies received and the monies given.
In conclusion, swap rate is an essential component of understanding the pricing of derivatives contracts. Whether it is an interest rate or currency swap, it is the rate at which one side of the contract exchanges with the other side. The key factors affecting the rate are the prevailing market conditions and the type of derivative being priced. The swap rate will usually be set as a spread to the counter-party rate, and can either move in the same direction or different directions depending upon the terms of the agreement.
An interest rate swap is an agreement between two counterparties to exchange two streams of cash flows based on certain interest rates over an agreed period of time. The two rates being exchanged in the swap are the counter-value rate and the swap rate or fixed rate. The fixed rate is determined by the government or central bank's benchmark rate, such as a treasury yield or the Federal Funds Rate. The floating-rate payment is determined by a given reference rate such as prime rate, Fed Funds Rate, London Interbank Offered Rate (LIBOR) or Eurodollar Futures, among others. The swap rate will often be set as a spread to the counter-party reference rate, giving a net rate that can both move in the same direction or in different directions depending upon the terms and conditions of the agreement.
In a currency swap, two parties agree to exchange two amounts of different currencies where each party pays interest on the currency they owe and receives interest on the currency they own. The currency swap rate is set by the price at which the exchange of two currencies can be made at a given date (in other words, the rate of exchange can be agreed upon). The rate is determined by prevailing market conditions and will depend on a number of factors such as the current supply of and demand for the currencies in question, any ongoing economic policies or agreements between the countries involved and the amount of time involved in the swap. The swap rate is a way of calculating the cost of the exchange and will reflect the difference between the monies received and the monies given.
In conclusion, swap rate is an essential component of understanding the pricing of derivatives contracts. Whether it is an interest rate or currency swap, it is the rate at which one side of the contract exchanges with the other side. The key factors affecting the rate are the prevailing market conditions and the type of derivative being priced. The swap rate will usually be set as a spread to the counter-party rate, and can either move in the same direction or different directions depending upon the terms of the agreement.