what is the example of interest rate swap and currency swap, only example.?
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Answer:
Interest rate swap :
For example, assume bank ABC owns a $10 million investment, which pays the London Interbank Offered Rate (LIBOR) plus 3% every month. Therefore, this is considered a floating payment because as the LIBOR fluctuates, so does the cash flow.
On the other hand, assume bank DEF owns a $10 million investment which pays a fixed rate of 5% every month. Bank ABC decides it would rather receive a constant monthly payment while bank DEF decides to take a chance on receiving higher payments. Therefore, the two banks agree to enter into an interest rate swap contract. Bank ABC agrees to pay bank DEF the LIBOR plus 3% per month on the notional amount of $10 million. Bank DEF agrees to pay bank ABC a fixed 5% monthly rate on the notional amount of $10 million.
Currency swap :
For example, assume bank ABC owns a $10 million investment, which pays the London Interbank Offered Rate (LIBOR) plus 3% every month. Therefore, this is considered a floating payment because as the LIBOR fluctuates, so does the cash flow.
On the other hand, assume bank DEF owns a $10 million investment which pays a fixed rate of 5% every month. Bank ABC decides it would rather receive a constant monthly payment while bank DEF decides to take a chance on receiving higher payments. Therefore, the two banks agree to enter into an interest rate swap contract. Bank ABC agrees to pay bank DEF the LIBOR plus 3% per month on the notional amount of $10 million. Bank DEF agrees to pay bank ABC a fixed 5% monthly rate on the notional amount of $10 million.