This gives the owner of the swaption the right to enter into a swap where they trade the floating leg to receive the fixed leg. Straddle Swaption. This is a combination of the payer and receiver swaptions. Basically, the owner of the swaption is betting on a large move in the value of the underlying in either direction, so they purchase both a put and call option. Only if there is little movement, the owner of the swaption makes no profit.
The basic mechanism for profiting with swaps and swaptions is the same. The only difference is that a swap contract is an actual agreement to trade the derivatives, while a swaption simply is a contract to purchase the right to enter into a swap contract during the indicated period. The easiest way to think about swaps and swaptions is that a swap is an immediate trade, while a swaption is the right to enter a trade at some point in the future. There are many types of swaps and swaptions conducted through contracts on the swaps market.
The following are the most common:. Interest Rate Swaps. Interest rate swaps are the most common types of swaps. In these swaps, legs exchanged are interest rate obligations on a financial instrument such as a bond, for example based on a notional principal amount. The principal amount is not traded—just the interest rate payments. Interest rate swaps are commonly used to hedge exposure to floating rate debt, i.
Currency Swaps. In currency swaps, parties exchange interest and principal payments on debt denominated in different currencies, therefore hedging on a change in the value of the currency, not the interest rate itself. Commodity Swaps.
In commodity swaps, parties exchange for a floating commodity price, such as in the trade of crude oil. Debt-Equity Swaps. In debt-equity swaps, fixed rate instruments like debt, for example, bonds, are exchanged for non-fixed instruments, such as stocks. Total Return Swaps. In total return swaps, the total return from an asset is exchanged for a fixed interest rate.
This allows the party holding the fixed interest rate leg to have exposure to the underlying without needing the capital to hold it. While technically anyone can trade in swaps, retail investors do not usually engage in swaps.
Instead, swaps are over-the-counter contracts conducted between businesses or financial institutions. The major role of swap intermediaries is to broker deals, but they can perform a number of other valuable functions. One party to an interest rate swap receives a fixed cash flow and wants to exchange it for a flow based on current interest rates.
The other party has the opposite goal -- exchanging floating for fixed. A swap intermediary, also known as a swap bank, is in the business of matching potential swap counter-parties and helping to negotiate a deal between them. Frequently, the swap counter-parties are unknown to each other even after the deal is consummated, because each party deals only with the swap intermediary. The intermediary takes a fee or a percentage of the swap cash flows, depending on the contract details.
Swap counter-parties often value anonymity because of competitive considerations. All of these tidbits of information could, if revealed to a competitor or other market participants, have an adverse effect on the counter-party. For example, a hedge fund might form an opinion on prices in a particular market and engage in large swaps to benefit from the opinion.
The hedge fund would not want to tip off others, because this might affect prices in the market covered by the swap. It collects and forwards periodic payments between counter-parties, thereby maintaining anonymity.
Frequently, the intermediary also performs credit services, including assessing the creditworthiness of the counter-parties and even guaranteeing timely payment of cash flows. For a fee, the intermediary agrees to make good on all or part of a cash payment if one of the counter-parties defaults on its obligations.
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Betting odds allow you to calculate how much money you will win if you make a bet. Quite simply, for every value of B that you bet, you will win A, plus the return of your stake. They are an alternative to seeing betting odds in the fraction format, and in our opinion, are easier to work out.
Traditionally, fractional odds have been used in the UK, especially at racecourses and on the high street. There are two key differences. Generally, decimal odds are easier to understand. Based on this, there has a movement to attract more people to horse racing by making it more accessible to the average punter. Ten years ago, if you were going to Cheltenham, all the odds would be displayed as fractional odds.
The second difference between the formats is that fractional odds only represent winnings, and do not include the returned stake compared to decimals which do include the stake. The transition from fractional odds to decimals largely kicked off with the growing popularity of the betting exchanges such Betfair. These are hard to compute for the punter and are not a great way of showing betting odds explained. You may find that your favourite online betting site presents the odds exactly how you likely them to be.
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Don't gamble unless you know the facts. This pushes out the settlement by another two trading days. This strategy, called a rollover , is created through a swap agreement and it comes with a cost or gain to the trader, depending on prevailing interest rates. The forex market works with currency pairs and is quoted in terms of the quoted currency compared to a base currency. The investor borrows money to purchase another currency, and interest is paid on the borrowed currency and earned on the purchased currency, the net effect of which is rollover interest.
In order to calculate the rollover interest, we need the short-term interest rates on both currencies, the current exchange rate of the currency pair and the quantity of the currency pair purchased. The current exchange rate is 0. The number of units purchased is used because this is the number of units owned.
The short-term interest rates are used because these are the interest rates on the currencies used within the currency pair. The investor in our example owns Canadian dollars, so he or she earns 4. The product of the difference in the numerator of the equation is divided by the product of the exchange rate and because this puts our numerator into a daily figure.
If, on the other hand, the short-term interest rate on the base currency is below the short-term interest rate on the borrowed currency, the rollover interest rate would be a negative number, causing a reduction in the value of the investor's account. Rollover interest can be avoided by taking a closed position on a currency pair.
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