Interest rate swaps - part 1
Taught by Ben Wilson · AI tutor support included
You'll learn how interest rate swaps work as a hedging tool and why companies use them instead of forwards or futures. This video breaks down the mechanics of swaps—how you borrow at one rate, exchange interest payments with another borrower, and benefit from comparative advantage in the market.
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In this lesson
- 0:00 Interest rate swaps explained
- 0:43 How swaps work in four stages
- 1:51 Why companies use swaps over direct borrowing
- 4:05 Counterparty risk and swap limitations
About this lesson
You'll discover the key reasons to swap: accessing longer-term fixed rates, exploiting market pricing anomalies, and managing exposure to interest rate changes. We'll also cover the main risk to be aware of: counterparty default and what happens if your swap partner fails to pay. This is part one of a detailed exploration of swap calculations, which require careful step-by-step methodology. Understanding swaps is essential for AFM and other advanced finance modules where hedging strategies appear frequently in case studies and exam questions. By the end, you'll see why swaps are more complex than other interest rate products—but also why they're powerful tools for managing long-term borrowing costs and interest rate risk.
Duration: 4m
Transcript
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