Description:-
An Asset Swap is an Interest Rate Swap or Cross Currency Swap used to convert the cashflows from an underlying security (a Bond or Floating Rate Note ), from Fixed coupon to Floating coupon, Floating coupon to Fixed Coupon, or from one currency to another. The terms and conditions of the Asset Swap are the same as for an Interest Rate Swap or Cross Currency Swap. The underlying security and swap may be transacted together (as a package) with the same counterparty or separately with different counterparts. The Asset Swap may be transacted at the time of the security purchase or added to a bond already owned by the investor. A Fixed Rate Bond plus an Asset Swap converting the bond to floating rate is known as a Synthetic Floating Rate Note. The security plus Asset Swap can be sold as a package, or separately.
An Asset Swap is an agreement between two parties to exchange interest payments. However, an Asset Swap is unique in that one interest payment is tied to cash flows from an investment, such as corporate bonds or notes with fixed coupons. The other payment is typically tied to an alternative index, such as a floating rate or a rate denominated in a different currency.
Why are they traded?
Asset swaps are commonly used by investors who seek to transform the cash flows of an asset or pool of assets without affecting the underlying investment position. For instance, suppose a U.S. fund manager want to own a particular Euro-denominated fixed rate issue, but prefers to receive floating rate US dollar cash flows. The investor could purchase the bond and then enter into asset swap to receive 6 month US LIBOR payments (+/- spread) in return for paying a fixed rate coupon in Euros.
The swap would be adjusted to par such that the fixed payments on the swap match the fixed payments on bond. The net result is that the fund manager owns the desired investment with the desired cash flows.
Life cycle events: –
Interest and Financing leg
No upfront fees. Termination fees applicable on early terminations.
OTCWIRE 