Go back to the [[Risk Management Main Page]]
Financial swaps swap a risk with someone else.
Most common are interest rate swaps.
Almost every company uses or considers using them re: their debt payments.
Company-specific interest rate
#LIBOR - London Inter-Bank Offer Rate
Each company has it’s own interest rate
LIBOR floats and changes based on the Fed/central bank rate
Company’s rate = Libor+ - LIBOR + Company Specific rate
LIBOR is usually just above the cash rate
Interest swaps swaps out the floating interest rate.
You buy a slightly higher interest rate for 5 years to make sure you’re covered if the LIBOR rate climbs above the rate you bought the swap at.
eg. LIBOR —> 1% .: Buy 5-year swap @2% then LUBOR —> 3% .: you still pay 2%
Typical to lose money up front but you’re hedged against big swings up.
Company can still lose money if the LIBOR rate falls instead of rises after buying the swap.