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Chapter 11
Interest rate swaps
6.1 Definition
An interest rate swap is an agreement whereby the parties agree
to swap a floating stream of interest payments for a fixed stream of
interest payments and via versa.
There is no exchange of principal.
6.2 Reasons for using swaps
As a way of managing fixed and floating rate debt profiles without having to
change underlying borrowing.
To take advantage of unexpected increases or decreases in rates.
To hedge against variations in interest rates.
To benefit from ‘comparative advantage’ i.e. to achieve more favourable interest
rates.
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