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Revision as of 16:08, 11 December 2023
, 11 December 2023→Swaps are usually synthetic loans
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Is that the sound of [[Lehman]] [[horcrux]]<nowiki/>es sparking up I hear? | Is that the sound of [[Lehman]] [[horcrux]]<nowiki/>es sparking up I hear? | ||
===Fixed/floating swaps=== | |||
But are synthetic equity swaps an odd use case? Are other kinds of swaps more bilateral, and less “lendy” in nature? | |||
Take interest rate or cross-currency swaps. Surely paying a fixed rate and receiving floating isn’t loan-like? | |||
Again, the key is to consider the respective parties’ economic positions before and after trading. The customer changes its net position; the [[dealer]] does not. Swapping fixed for floating is to ''keep'' a fixed-rate “asset” (the source of the funds the customer uses to pay its fixed rate is, ''de facto'', a fixed rate asset) — and to acquire a floating-rate asset having the same principal amount. This is the principal amount of the implied loan the customer takes to acquire the cashflows of the floating-rate asset. The principal on the floating-rate asset cancels out against the principal of the loan, therefore: the customer is borrowing at a fixed rate to acquire a floating-rate exposure. The customer’s position is the present value of the floating rate it has bought minus the present value of the fixed rate of its financing. | |||
Without a loan, the customer would have to sell its whole fixed-rate asset and use the proceeds to buy a floating-rate bond from the dealer. That is, pay the principal amount to the dealer, and acquire the interest and principal cashflows of a floating rate asset. Here the customer is not borrowing anything. | |||
“But, but, but JC: can’t you see? If you pay someone 100 and they pay you the return of an instrument worth 100 and interest, you have loaned them interest?” | |||
Quite so: but that is the nature of a floating-rate bond. It ''is'' a loan. But it is ''not a loan to the dealer''. It is a loan to the issuer of the floating-rate bond. If the dealer is paying you the return of a floating-rate bond you may be assured it has used your money to buy a floating-rate bond, to hedge itself. You have not, net, lent the dealer ''anything''. | |||
==== On the case for one-way margin ==== | ==== On the case for one-way margin ==== | ||