Description:-
In a basis swap counterparties exchange 2 different floating rates instead of regular fixed and floating like a plain Vanilla IRS. This means that one counterparty into this swap will pay a regular floating rate in exchange for a compounded floating rate as specified in the contract.
While calculating the coupon for compounded floating rate, each monthly accrual will be added to the principal amt/original notional for calculating the next accrual.
Why are they traded?
For example, a company lends money to individuals at a variable rate that is tied to the London Interbank Offer (LIBOR) rate but they borrow money based on the Treasury Bill rate. This difference between the borrowing and lending rates (the spread) leads to interest-rate risk. By entering into a basis rate swap, where they exchange the T-Bill rate for the LIBOR rate, they eliminate this interest-rate risk.
Life cycle events: –
Simple interest and compounded interest leg.
No upfront fees. Termination fees applicable on early terminations.
OTCWIRE 