Template:M tldr isda a swap as a loan: Difference between revisions

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(Created page with "“End-user” swaps are implied margin loans from a dealer to a customer — customers use swaps to change their market exposure whereas dealers delta-hedge to flatten their overall position, leaving only customer credit exposure — this is economically the same as lending to the customer receiving a financing rate, and paying the return of a principal asset minus loan principal and interest — this is equally true of synthetic margin loans like equity swaps a...")
 
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“End-user” swaps are implied margin loans from a [[dealer]] to a [[customer]] — customers use swaps to change their market exposure whereas dealers delta-hedge to flatten their overall position, leaving only customer credit exposure — this is economically the same as lending to the customer receiving a financing rate, and paying the return of a principal asset minus loan principal and interest — this is equally true of synthetic margin loans like equity swaps and regular derivatives like interest rate swaps — in the real world, floating and fixed rates do not exist independently of principal debt investments — derivatives are tools to hypothetically separate them, but they must eventually be anchored to real-world investments, and these must be somehow financed — on this view an interest rate swap is a synthetic fixed-interest margin loan made against a bond.
“End-user” swaps are implied [[Margin lending|margin loan]]<nowiki/>s from a [[dealer]] to a [[customer]] — customers use swaps to change their overall market exposure whereas dealers hedge to zero-out their overall position — customers have only market exposure; dealers have only customer credit exposure — this is economically the same as customers borrowing to buy an asset, paying a financing rate, and receiving the return of that asset less loan principal and interest — floating and fixed rates do not exist independently of principal debt investments — derivatives are tools to hypothetically separate them, but they must eventually be anchored to real-world investments, and these must be financed — even an [[interest rate swap]] is a [[synthetic]] fixed-interest [[Margin lending|margin loan]] made against a [[Debt security|bond]].

Revision as of 09:41, 15 December 2023

“End-user” swaps are implied margin loans from a dealer to a customer — customers use swaps to change their overall market exposure whereas dealers hedge to zero-out their overall position — customers have only market exposure; dealers have only customer credit exposure — this is economically the same as customers borrowing to buy an asset, paying a financing rate, and receiving the return of that asset less loan principal and interest — floating and fixed rates do not exist independently of principal debt investments — derivatives are tools to hypothetically separate them, but they must eventually be anchored to real-world investments, and these must be financed — even an interest rate swap is a synthetic fixed-interest margin loan made against a bond.

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