Interest Rate Swap and Currency Swap

Interest Rate Swaps are OTC derivatives that allow banks and borrowers to access long-term interest rates without having a long-term funds. The main barriers for banks to provide long-term funds is credit risk and liquidity needs, while many clients have long-term projects that require long-term pendanan with fixed rate. Interest rate swap is a solution because it allows both parties to swap interest rate swap without doing the amount of principal.

Interest rate swaps are traded to maturity 30 years (although only traded a little bit above 10 years). The maximum maturity depending on the currency and bond markets in the relevant currency, because the bonds used to hedge the swap.

Vanilla interest rate swap has a fix that was'swap 'on the floating rate index such as 1 month, 3 month or 6 month LIBOR → means that all parties agree to exchange the difference in these two interest rates. Because LIBOR rate changes every time the net exchange will differ from time to time.

Interbank market trading in the market especially vanilla swap but there are many variations to meet customer needs. Interest rate swap raises interest rate risk. Banks use various hedging instruments to manage interest rate risk.

Characteristics similar to interest rate swaps, except that the flow rate is in a different currency, for example: U.S. Dollar-euro interest flows to flows.
The main difference with the interest rate swap:
Interest Rate Swap
- No subject is transferred
- Raises the risk of interest rate

Currency Swap
- Essential in the transfer / on-the spot exchange rate
- Raises the risk of interest rates and exchange rates