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Assignment about Treasury and Risk Management.

   

Added on  2022-09-27

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Treasury and Risk Management

1. What is Swap?
It is one type of derivative agreement where two or more parties enter into the contract or
agreement to exchange their liabilities and cash inflows from various financial
instruments. Swaps are mostly used for hedging currency and risk related to interest
fluctuation. There are several types of swap such as commodity swap, debt-equity swap
interest rate swap, currency swap, and other swaps.
2. Why swap is beneficial to both the parties who enter into the swap contract?
Both parties involved in the swap agreement get the advantage of cost-benefit as both
parties initially borrow from the market and receive comparative benefits and then they
swap the interest liability and preferred currency.
3. Explain how each party gets a comparative advantage by entering into swap?
According to Benos et al. (2020, p-159), if the parties enter to swap interest rate then one
of the parties will be hedged from the risk of interest rate and the other party to the
contract will get profit from the fluctuating rate. In swap one of the cash flow is variable
while the other cash flow is fixed and the cash flows are based on index price, interest
rate, and fluctuating exchange rate.
4. Example of comparative advantage by applying interest rate swap
Suppose Bank of Singapore wants a debt which carries floating interest rate and the other
Singapore Company requires fixed interest rate debt
The Singapore Bank can get at 12.5 percent fixed rate or also at LIBOR and the
Singapore Company has an option to borrow at 1 percent above the rate of LIBOR or at
15 percent interest rate.

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