In: Finance
Who benefits in an interest rate swap? Explain
An interest rate swap is a type of derivative contract by which two parties agree to exchange one stream of future interest payments for another.Interest rates swap include the exchange of a fixed interest rate of payment for a floating rate of payment
In interest rate swaps both the parties are gainers as it helps to hedge with opposite stream of payments.It is a swap agreement in which one party is receiving fixed rates interest payments and another is receiving floating rates payments.They mutually agree that they would prefer the other party's loan agreement over their own.In the interest rate swap both parties get what they want.One parties get the risk protection of a fixed rate while the other gets the exposure to potential profit from a floating rate.Ultimately,one party will reap the financial reward while the other sustains a financial loss.
If interest rates rise during the term of the swap arrangement, then the party receiving the floating rate will profit and the party receiving the fixed rate will see the loss.
If interest rates decline,then the party getting the paid guranteed fixed rate return will benefit,while the party receiving flaoting rate payment will incur a loss
So this a hedge taken by both the parties by exchanging the stream of payments.