Interest Rate Swaps
The assertion that interest rate swaps require markets to be inefficient is inaccurate. While swap markets benefit from some inefficiency, firms may have compelling non-financial reasons for wanting to make changes to the timing of their cash flows, which is the basis for firms undertaking swaps. For these end users of swaps, the swap is most beneficial at fair value, and that is the price at which the swap will typically be set. The counterparties are expected to agree on the expected future direction of the floating component of the swap, meaning that swaps depend more on efficient markets than inefficient markets -- the latter makes it more difficult for the counterparties to agree on fair value.
Interest rate swaps are contractual arrangements between two parties, where they agree to exchange payments based on a principal amount, for a fixed period of time (CDIAC, 2007). The most common type of swap is the plain vanilla swap, where one counterparty swaps the payments from a floating rate and the other counterparty swaps the payments from a fixed rate. The floating rate is often LIBOR and the fixed rates are often based on U.S. Treasuries (Ibid).
The pricing of swaps is critical to understanding why the markets do not need to be inefficient. When the swap is made, the present value of the different cash flows involved is going to be equal. If the present value of the two cash flows were not equal, then one...
Numerous products are available, including currency or exchange rate swaps, forward contracts, futures and options. Another option, which covers some of the translation risk as well, is to index costs and revenues to the exchange rate. Translation risk is more difficult to address, but there are methods. DWI can build an operational hedge, whereby inflows from a particular country are matched by outflows. Other tactics, such as using an
……South African Municipalities Municipal Revenue Loss Reduction through Improved Municipal Valuation Methodologies:Balance Sheet Enhancement of South African Municipalities to Improve Rates and Taxes Revenue GenerationAbstractThis study examines the property valuation process of Municipalities in South Africa and develops a strategy for strengthening that process in order to more efficiently value properties and ultimately to enhance municipal balance sheets and increase revenue streams. This study proposes an innovative valuation method based
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