8. Case Studies (Real-World Applications)
Case Study 1: Company Managing Interest Rate Risk
Situation:
A company has a floating-rate loan but prefers stable payments.
Strategy:
- Enters an interest rate swap
- Pays fixed, receives floating
Outcome:
- Floating payments offset loan exposure
- Company effectively converts loan to fixed rate
Insight:
Swaps allow firms to reshape risk without refinancing debt.
Case Study 2: Bank Using Swaps for Risk Management
Situation:
A bank has many fixed-rate assets but floating-rate liabilities.
Strategy:
- Uses swaps to receive fixed and pay floating
Outcome:
- Aligns asset and liability structure
Insight:
Swaps help institutions manage balance sheet risk.
Case Study 3: Currency Swap Between Two Firms
Situation:
- Malaysian firm needs USD funding
- US firm needs MYR funding
Strategy:
- Enter a currency swap
Outcome:
- Both access foreign currency at better rates
Insight:
Currency swaps reduce exchange rate exposure and borrowing cost.
Case Study 4: Swap Value Changes Over Time
Situation:
After entering a swap, interest rates change.
Outcome:
- One party gains, the other loses
- Swap now has a market value
Insight:
Swaps are not static—they are marked to market based on rate changes.
9. Key Takeaways
- Swaps exchange cash flows over time, not assets
- Built from multiple forward agreements
- Initially priced at zero value (fair contract)
- Widely used for interest rate and currency risk management
- Value changes as market conditions change
10. Quick Practice
Scenario:
A company has a floating-rate loan but expects interest rates to rise.
Question:
- What type of swap should it enter?
- What position should it take (pay fixed or pay floating)?