This lesson examines the practical application of futures, swaps, and forwards in a corporate treasury context.
6.1 Forward Contracts
Forwards are primarily used to hedge transaction exposure . They allow treasurers to lock in an exchange rate or interest rate for a future date, eliminating uncertainty.
6.2 Interest Rate Swaps
Swaps are a flexible tool for managing interest rate exposure . A corporate can use a swap to convert a floating-rate loan into a fixed-rate loan, or vice versa, to match its risk profile.
6.3 Futures Markets
Futures are used for both hedging and speculation . Common types include:
-
Short-Term Interest Rate Futures (STIRs):Â Used to hedge short-term interest rate exposure.
-
Treasury Futures:Â Used to hedge government bond price risk.
-
Currency Futures:Â Used to hedge FX exposure.
6.4 Swaps in Practice
A swap is an OTC agreement to exchange cash flows. The most common type is the interest rate swap, where one party pays a fixed rate and the other pays a floating rate. Swaps are also used to exchange currency cash flows (currency swaps).