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Assignment on Importance of Swaps Derivative Instruments

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Added on  2020-04-07

Assignment on Importance of Swaps Derivative Instruments

   Added on 2020-04-07

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Running head: FINANCEFinanceName of the Student:Name of the University:Author Note:
Assignment on Importance of Swaps Derivative Instruments_1
FINANCE2Table of ContentsIntroduction......................................................................................................................................3Swap derivative instruments............................................................................................................3Types of swaps derivative instruments............................................................................................3Importance of swaps derivative instruments...................................................................................6Typical users....................................................................................................................................6Usage as a risk management tool.....................................................................................................7Pricing..............................................................................................................................................8Effects of guidelines and Disclosure necessities of the instruments as required by the SecuritiesExchange Commission....................................................................................................................8Applying financial engineering to swap derivative instrument and other securities.......................9Conclusion.....................................................................................................................................11Reference List................................................................................................................................12
Assignment on Importance of Swaps Derivative Instruments_2
FINANCE3Introduction This study deals with discussion of derivative instruments named as forwards, futures,swaps and options (Weber, 2016). All these derivative instruments work as risk managementinstruments where these instruments plays an essential part in managing risk for internationalcompanies as well as portfolio supervisors and recognized depositors. Using these derivativeinstruments provide wide range of opportunities to the speculators in and across the world(Bingham & Kiesel, 2013). The current segment identifies one derivative instrument (swap) fordiscussion purpose. There are different types of swap derivative instruments that are commonlyused by the speculators and these are interest rate swaps and currency swaps that are traded overthe counters between fiscal organizations. In addition, these agreements are not traded onexchanges. Furthermore, retail investors never trade in swaps (Sundaresan & Sushko, 2015). Thecurrent segment proper explains the working of swap derivative instruments in the most efficientway. Swap derivative instruments A swap is one of the derivative contracts that are made between two parties forexchanging of cash flows in the future (Rahman et al., 2015). Types of swaps derivative instruments There are even other types of swaps that are mentioned below with proper justification:Basis rate swap Bond swapCommodity swap
Assignment on Importance of Swaps Derivative Instruments_3
FINANCE4Credit Default swap Volatility swapInterest rate swap Currency swap Forex swap Interest rate swaps- Interest rate swaps is one of the type of swaps derivative instrument that areessentially exchange of interest payments between two counter parties. There are three kinds ofinterest rate swaps that include floating for fixed, fixed for floating and floating for floating. Inthis swap, there is no exchange of principal and only coupon movements (Popova & Simkins,2015). For instance:Fixed rate Floating rate Company A 11%LIBOR+1%Company B 10%LIBOR+0.5%
Assignment on Importance of Swaps Derivative Instruments_4

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