Capital Markets Examiner School, Providence, RI

Interest Rate Swaps

• An interest rate swap is an agreement between two parties (referred to as counterparties) under which a series of fixed rate payments are exchanged for a series of floating rate payments for an agreed upon term.

Primary Uses for IRR Swaps

Balance Sheet Hedging  Effective and efficient way to manage interest rate risk on the balance sheet  When hedging, the goal is not to profit, it’s to protect the Net Interest Margin (NIM) against adverse shifts in the yield curve  Limiting the upside, but protecting against the downside risk

Loan Hedging (offering swaps to borrowers)  Back-to-back swaps or other variations  Also known as “Client Derivative Swaps”