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Interest Rate Swaps

Currency Valuation and Further FX Strategy, Foreign Exchange (FOREX, FX), Currency Markets Strategy, Interest Rate Swaps, Interest Rates Explained »

The original motivation for the participation in an interest rate swap was for the two parties to reduce their borrowing costs. This was achieved by both parties borrowing in the market which they has a comparative advantage in their cost of borrowing. They would then swap their interest rate commitments at a rate beneficial to both parties and for a specified period. However, as international markets became more integrated and informationally more efficient, scope for the arbitraging interest rate differentials between borrowers in different markets reduced significantly. Rather than the …