(28).---TYPES OF SWAPS.

Types Of Swaps.

There are four types of swaps.

(1).Interest Rate Swaps.

(2).Currency Swaps.

(3).Commodity Swaps.

(4).Equity Swaps.

(1).Interest Rate Swaps.

An interest rate swap is an exchange between two counter parties of interest obligations (payments of interest) or receipts (investment income), in the same currency on an agreed amount of notional principal for an agrred period of time. The agreed amount is called "notional principal" because, since it is not a loan or investment.The principal amount is neither exchanged at the outset nor rapid at maturity.The most common interest-rate swaps involve the exchange of interest from a fixed to a floating basis or vice versa.

(2).Currency Swaps.

A currency swap is an agreement to exchange interest obligations or interest receipts between two different currencies.The market standard is to quote a fixed rate of interest in one currency against a floating rate of interest (generally in the US $). A rate of exchange between the two currencies must be established at the outset.This will produce principal amounts in the two currencies upon which payments of interest will made. At the final maturity of the transaction, along with the final periodic payment of interest, the swap counterparties must exchange the principal amounts of the two currencies. Which were fixed at the outset. The exchange of two principal amounts at the beginning of the swap is not necessary, but it can take place if required. The exchange of principal at the end of the transaction must take place. It is this exchange, which offsets interest-rate differentials between the two currencies.

(3).Commodity Swaps.

This is a swap where payments are based on the prices of commodities. One party pays a fixed price for the good over life of the swap while the other pays a floating price for the good, depending on current market prices.

(4).Equity Swaps.

With an equity swap, payments are made based on a notional principal. Which is an equity portfolio. The payments are fixed & floating. The floating rate sum is based on the return on the relevant index for the period while the fixed rate sum is agreed in advance.