Interest Rate Swaps And Its Application In Practice

After the collapse of the Bretton Woods system, the exchange rate and interest rate fluctuate seriously in international financial markets. The crisis of international debt and the shift of international saving and investment brought huge risks to cooperation management and impacted the safety and liquidity of bank assets. In order to lower management cost, to avoid assets risk, and to ensure the profit and security, some kinds of innovative financial instruments emerged. Swaps are the most important instruments and grow the most quickly among these. And IRS (Interest Rate Swaps) and currency swaps are the basic swaps instruments. The IRS came into being one of the most kernel swaps of all and also being one of the most important and basic derivative instruments. After appearance in 1981, it grows more than 30% averagely per year. The main reason for so quick development in IRS transaction is the characteristics of lowering financing risk , that is flexible and easy to operate. The study and use of IRS is more advantage abroad.The more complexity and changeability of the economic and politic are, the more important of IRS as the risk management instrument is. It's much advisable for our corporations and domestic banks to use it. China has little knowledge and use of IRS. It is a new operation domestically. On 9th Feb 2006, the first deal of RMB IRS was done between China Development Bank and China Everbright Bank, which is a landmark of rate marketrization and finance development.The thesis purposes to introduce the IRS by definition, structure and common pricing. Then it anatomizes how to take it into practice in cooperation and bank management. It also analyzes the example and problems of its use. It will do harms to the financial system.This thesis is divided into five chapters. The structure and basic content are as follows:Chapter One summarizes the IRS. It first introduces the origin, definition and categories of financial swaps. Part II tries to explain the economic principles.Chapter Two comprehensively reviews the theory and empirical evidence of IRS. It defines that it is an agreement of change two cash flows. It consists of the structure by market tradition, basic instance and agency instance and class of standard and nonstandard. At last, it also expounds the pricing in common use.The author purposes to get an analysis the practice of IRS on the academic angle in Chapter Three. It can be conclude the goods of the IRS. By utilizing them, it makes fixed or floating assets, increases the return and optimizes mature in assets management. As debt management, it also compounds fixed or floating debts, lowers the cost and composes interest swap option to lock the risk, meanwhile, to get the income.Chapter Four carries on the practical use in cooperation and bank by a lot of examples. To cooperation, it can control financial risk or get financial gains by discounting cash in and out in swap deals. Lowering capital cost is beneficial to different credit rate companies because of different borrowing capability. To bank, it avoids the rate risk in assets and debt, matches the mature, gains the commission and wins the high quality clients.Chapter Five gives the practical analysis of IRS that emerges in China. This chapter reviews the history of IRS in China. According to the first rate swap deal, this chapter analyzes the necessity and feasibility of developing IRS in China, the present situation of Chinese financial swaps, then, gives some thoughts of some policy arrangement.This thesis is based on the IRS definition, structure and common pricing, puts importance on the academic arguments and strengthens of its practical use and applying in the management of cooperation and bank. Also, carrying on the example of first deal, it can be some reference effect in practice, author hopes.