Interest Rate SWAPS Literature review Example | Topics and Well Written Essays - 2000 words

Interest Rate SWAPS - Literature review Example According to Pelsser (2000) the market related to derivative securities has been stated to be perceived similar to an insurance market in relation to the considered financial risks. The rapid rate of globalisation in terms of the capital markets has resulted in a significant rise in the level of volatility related to interest rate across the globe. Numerous companies displayed a preference in favour of purchasing insurance in opposition to the rising improbability and instability with regard to the market linked to interest rate. Owing to this particular rationale, the market related to interest rate derivatives witnessed a sharp rise and development during the past two decades (Crotty & North Carolina State University, 2006). It was stated by Whaley (2006) that interest rate derivatives are referred to those kind of derivatives which are supposed to make available the pay-offs that are ascertained by the way of alterations that takes place in the interest rates. The similar derivati ve products that were made use of with the intention to handle and deal with the risks related to foreign exchange were found to posses the competence of managing the risks related to interest rates as well (Kohn, 1990). The popular form of derivative product that was found to be used in this context was the interest rate swaps. ... The advantage of tailoring or modifying the risks associated with interest rates in accordance with the requirements of a particular risk manager was attributed to be the major cause behind its popularity. Interest rate swaps have been recognised to be the most extensively applied form of interest rate derivative (Grant & Marshall, 1997; Bodnar & et. al., 1995; Moffet & Karlsen, 1994). Interest rate swap has been stated to be quite an effectual instrument. It is competent of being structured at quite a decreased degree of cost and is also supposed to be less pricey in comparison to a fresh loan with a fixed rate (Schaeffer & Ludwig, 1993). According to Coyle (2001), the concept of interest rate swap is referred to the swap over of payment of interests based on a theoretical amount with regard to the principal. In such instances, one particular party is believed to disburse a preset interest rate with regard to the principal amount for the duration in relation to the swap. Similarly, the other involved party continues disbursing a floating interest rate which is attuned or rather periodically altered. The notion of interest rate has been explained as the sum of money or funds that is assured to be paid by a particular borrower to the concerned lender. The usage or the execution of an interest rate is learnt to be dependent on the degree of relative credit risk as it is believed that the more the expected degree of credit risk, the rate of interest that is assured by the specific borrower also soars and gets increased in relation to it. The interest rate swap is considered to be quite popular and has been stated to be amongst the chief