Interest Rate Swap

About Interest Rate Swaps

  • Interest Rate Swaps help financial institutions mitigate risks associated with fluctuating interest rates. In a Single Currency Interest Rate Swap (IRS), two parties agree to exchange interest payments on a notional principal amount in a single currency at regular intervals for an agreed-upon period.
  • Dealing And Quotations
  • The trade date signifies the agreement date for swap conditions.
  • The effective date marks when the swap begins, initiating interest payments.
  • The maturity date marks the end of the swap, halting interest accrual and terminating the agreement.
  • Swaps are typically quoted against standard benchmark rates on a non-amortizing notional principal, free from cash market margin requirements.
  • Rates are flat, and any amortising structures with custom rates are adjusted accordingly.
  • For instance, a quote of 9.75% - 10.25% against 3-month MIBOR indicates that the market maker:
  • Pays (bid) 9.75% fixed and receives 3-month MIBOR.
  • Receives (ask/ offer) 10.5% fixed and pays 3-month MIBOR.
  • Floating rate benchmarks can include:
  • Overnight money rates
  • Treasury Bills yields
  • Term money rates
  • Government Securities yields

     

    *Not all are these benchmarks are currently available in India.

Key Features of Interest Rate Swaps

Types

Engage in two types of interest rate swaps: Fixed to Floating Swap and Floating to Floating Rate Swap.

    Fixed to Floating Swap

  • In a Fixed to Floating Interest Rate Swap, one party receives cash flows at a fixed interest rate while simultaneously paying out at a floating interest rate, or vice versa. The interest payments are calculated based on a notional principal amount, with the floating rate typically referenced to a transparent benchmark such as the Mumbai Inter-Bank Offer Rate (MiBOR).

    • Floating to Floating Rate Swap

  • In a Floating to Floating Rate Swap, two parties exchange cash flows based on floating interest rates referenced to two different benchmarks. This allows for flexibility in managing interest rate exposure while aligning with each party's financial strategies.

Types

Who Can Enter IRS?

  • Banks, primary dealers and financial institutions can enter into rupee IRSes to hedge their exposure and for market making.

  • Corporate customers can enter into rupee IRSes only to hedge the interest rate risk on an underlying asset of liability. 

  • All participants can enter non-rupee IRSes only to hedge an underlying exposure. 

For more details, write to us at derivatives@hdfc.bank.in.

Who Can Enter IRS?

Frequently Asked Questions

HDFC Bank offers Interest Rate Swap (IRS) services to help clients manage interest rate risks. An IRS is a financial derivative that allows two parties to exchange interest rate cash flows, based on a notional principal amount, over an agreed-upon period. This helps in hedging against fluctuations in interest rates.

An Interest Rate Basis Swap is a financial derivative in which two parties exchange interest rate cash flows based on different money market reference rates or benchmarks. Unlike a typical interest rate swap where both parties exchange payments based on the same currency but different interest rate types (fixed or floating), a basis swap involves exchanging payments based on different interest rate benchmarks, such as switching from one currency's interbank rate to another. This type of swap allows parties to manage their exposure to fluctuations in different interest rate markets or to take advantage of interest rate differentials between markets.

An Interest Rate Swaps service is a financial derivative contract between two parties to exchange interest rate cash flows, typically one fixed-rate payment for one floating-rate payment. The principal amount is not exchanged, only the interest payments. For example, Party A, with a loan at a floating rate, may want to hedge against the risk of rising interest rates. Party B, with a fixed-rate loan, may prefer the stability of a floating rate. They enter into a swap where Party A pays Party B a fixed interest rate, and Party B pays Party A a floating interest rate based on a specified notional amount. Swaps allow parties to manage interest rate risk or to take advantage of different financing options in the market.