What is the cause of the difference between the net difference of receiving fixed-rate and paying...

What is the cause of the difference between the net difference of receiving fixed-rate and paying the floating rate for swaps using LIBOR rate and OIS rate (in this case the net difference using OIS rate is higher than the net difference using LIBOR given OIS paid less floating rate)

Solutions

Expert Solution

Net difference between receiving fixed rate and paying the floating rate for swaps using LIBOR rate and OIS rate.

Before that we will check what is fixed interest rate and floating rate. As compared to fixed interest rate, floating rate are comparatively cheaper. Fixed interest rates are 1%-2.5% higher than the floating interest rate. The increase and decrease in the floating interest rate is temporary, as it varies as per the market trends.

An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another over a set period of time, whereas LIBOR is the benchmark for floating short term interest rates which is set daily.

Receiving fixed rate for swaps helps the companies by reducing the uncertainty of future cash flows. Currency and interest rate swaps are used as financial tools to lower the amount needed to service as debt as a result of these advantages.Floating rate is much cheaper than the fixed rate. they are common in banking industry.

ekkarill92 answered 1 year ago

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