282 CHAPTER 7. MARKETS FOR CURRENCY SWAPS
Table 7.5:Swaps: Overviewdirect loan with best spread is ...
preferred loan is ... fixed rate floating rate
fixed rate same currency (do not swap) do interest swap
other currency fix/fix currency swap do circus swap
floating rate same currency do interest swap (do not swap)
other currency do circus swap flo/flo currency swapDepending on the combination of the preferred type of loan and the cheapest
available loan, one could use a fixed-for-fixed swap, a fixed-for-floating swap, or
a circus swap. Each of these swaps can also be used to speculate on changes in
interest rates or exchange rates. Likewise, base swaps are used to hedge against, or
to speculate on, changes in thetedspread.
These four swaps are just the most common types; in fact, many more exotic
swap-like contracts are offered. Thus, swaps have become increasingly popular with
financial institutions and large corporations. All of these swaps are based on the
principle of initial equivalence of the two legs of the contract. Thus, like forward
contracts on exchange rates or currencies, the initial value of a swap is zero. To
compute the market value of such a contract after inception, we just value each leg
in light of the prevailing exchange rates and interest rates.