General Information

Interest Rate Swap


To hedge long-term interest rate risks.

Brief Description

The interest rate swap is a derivative interest instrument in which both parties agree to make interest payments at fixed dates in the future. Normally, one party pays the other a fixed interest rate, while the other party makes interest payments in line with the future interest rate trend. The interest rate swap is mainly used for the management of large credit or asset portfolios, otherwise known as Asset and Liability Management ( ALM ). Loans, bonds, or bond portfolios cannot always simply be switched if interest rate changes are expected. With the interest rate swap the interest rate linking can be changed whilst keeping the basic position.

Example: a borrower who has taken out a long-term loan with a maturity of three years anticipates falling interest rates. The conclusion of a receiver swap (fixed recipient) enables him to hedge the interest rate risk without having to change the loan terms. He pays the bank a fixed rate of interest for the loan and gets this fixed interest rate back from the bank in the IRS . The bank, in return, charges him the variable interest. The fixed interest rate payments thus offset each other and the borrower pays a lower rate of interest at every fixing (if interest rates are actually falling). However, if his expectations are not borne out he pays more interest.

Profit Potential

As a hedging instrument: none


Limited to the interest rate difference, as capital is not exchanged.


An OTC framework agreement and a credit limit. Depending on the term, the credit limit is only debited by 2 - 5 % of the capital as this is not exchanged. Risk is limited to possible interest rate movements over the term of the swap.

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