Loan Swap For Lower Interest Rates
A swap is a financial exchange agreement in which one of the parties agrees to pay a series of monetary flows with a certain periodicity in exchange for receiving another series of flows from the other party. Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.
In a loan swap for lower interest rates, over a set period of time, a mutual exchange of periodic interest payments nominated in the same currency and calculated on the same principal but with different reference rates is performed.
The loan interest rate swap is a financial derivative that can be used as a hedging instrument to reduce credit risk before a rise in the interest rate. Interest swaps only change the structure of interest payments of assets or liabilities in the same currency, and principals are not replaced.
The reasons for using this derivative are:
- Reduction of credit risk by protecting companies against rising interest rates.
- Exchange coverage
- Portfolio restructuring
- Decreased risks due to lack of liquidity
They are a very useful tool in managing financial risk, since they allow companies to set a cap on the variable interest rate that will be paid throughout the life of a loan.
When to look for a swap contract and which one to choose will depend on many factors, but trying to offset and control the risks of a future cash flow deficit is a good financial decision that will allow you to use the benefits of the financial lever safely and stable within your business.
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