This article needs additional citations for verification. In financial accounting, an asset swap is an exchange of tangible assets for intangible assets or vice versa. Since it is a swap of assets, the procedure takes place on the active side of the balance sheet and has no impact on the latter in net assets formula investopedia forex to volume. In finance, the term asset swap has a particular meaning.
An example of this is where an institution swaps the cash flows on a U. An asset swap enables an investor to buy a fixed rate bond and then hedge out the interest rate risk by swapping the fixed payments to floating. In doing so the investor retains the credit risk to the fixed-rate bond and earns a corresponding return. An asset swap is the swap of a fixed investment, like a bond that will yield guaranteed coupon payments, for a floating investment, i.
It has a similar structure to a plain vanilla swap, but the underlying of the swap contract is different. There are several variations on the asset swap structure with the most widely traded being the par asset swap. Other types include the market asset swap and the cross-currency asset swap. The most common and standard one is par asset swap. The asset swap buyer purchases a bond from the asset swap seller in return for a full price of par.
Full price” is also known as “dirty price”, i. The asset swap buyer enters into a swap to pay fixed coupons to the asset swap seller equal to the fixed rate coupons received from the bond. The maturity of this swap is the same as the maturity of the asset. This transaction is shown in Figure 1. The fixed spread to Libor paid by the asset swap seller is known as the asset swap spread and is set at a break-even value so the net value of the sale of the bond plus the swap transaction is zero at inception. 1 to be paid at time t. The net up-front payment has a value 100-P where P is the full price of the bond in the market.
Both parties to the swap are assumed to be AA bank credit quality and so these cash flows are priced off the Libor curve. We cancel out the principal payments of par at maturity. For simplicity we assume that all payments are annual and are made on the same dates. As is standard for swaps, the break-even asset swap spread A is computed by setting the present value of all cash flows equal to zero. Li is the Libor rate set at time t i – 1. The fixed and floating sides may have different frequencies. We then solve for the asset swap spread A such that the present value is zero.
On a technical note, when the asset swap is initiated between coupon dates, the asset swap buyer does not pay the accrued interest explicitly. Effectively, the full price of the bond is at par. At the next coupon period the asset swap buyer receives the full coupon on the bond and likewise pays the full coupon on the swap. However, the floating side payment, which may have a different frequency and accrual basis to fixed side, is adjusted by the corresponding accrual factor. In the market asset swap, the net upfront payment is zero. Instead the notional on the Libor side equals the price of the bond and there is an exchange of notionals at maturity. Archived from the original on 12 April 2009.
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The latest markets news, real time quotes, financials and more. One of the reasons why so many people are attracted to trading forex compared to other financial instruments is that with forex, you can usually get much higher leverage than you would with stocks. While many traders have heard of the word “leverage,” few know its definition, how leverage works and how it can directly impact their bottom line. The concept of using other people’s money to enter a transaction can also be applied to the forex markets. In this article, we’ll explore the benefits of using borrowed capital for trading and examine why employing leverage in your forex trading strategy can be a double-edged sword.
Defining Leverage Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex, that money is usually borrowed from a broker. To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up. For a margin requirement of just 0.