DISCOUNT SWAP Meaning and
Definition
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A discount swap refers to a financial derivative instrument where two parties enter into an agreement to exchange cash flows based on a fixed interest rate and a floating interest rate. In this type of swap, one party pays the other party a fixed rate of interest in exchange for receiving a floating rate of interest. The discount aspect of the swap arises from the fact that the fixed rate received by one party is typically lower than the market rate, resulting in a discount.
Discount swaps are commonly used as a hedging tool to manage interest rate risk. They enable parties to effectively manage their exposure to fluctuations in interest rates by exchanging fixed-rate payments for floating-rate payments or vice versa. The discount received by the party paying the fixed rate acts as compensation for taking on the risk associated with the floating rate payments.
The terms of a discount swap can be tailored to suit the specific needs of the parties involved. The contract typically specifies the principal amount, maturity date, payment frequencies, and the reference rate used for calculating the floating interest rate.
Discount swaps are subject to various risks, including interest rate risk, credit risk, and liquidity risk. These risks can impact the overall performance and value of the swap. It is crucial for participants in discount swaps to carefully evaluate their risk tolerance and thoroughly understand the terms and conditions of the agreement before entering into such a transaction.
Common Misspellings for DISCOUNT SWAP
- siscount swap
- xiscount swap
- ciscount swap
- fiscount swap
- riscount swap
- eiscount swap
- duscount swap
- djscount swap
- dkscount swap
- doscount swap
- d9scount swap
- d8scount swap
- diacount swap
- dizcount swap
- dixcount swap
- didcount swap
- diecount swap
- diwcount swap
- disxount swap
- disvount swap
Etymology of DISCOUNT SWAP
The word "discount" is derived from the Old French word "descompter", which means "to deduct" or "reduce". It further originates from the Latin word "discomputare", combining "dis" (meaning "away" or "apart") and "computare" (meaning "to reckon" or "count").
The word "swap" has a more straightforward etymology. It comes from the Middle English word "swappen", meaning "to strike" or "to exchange quickly". It shares its roots with Old Norse "sveppa" and Old Frisian "swappia".
When combined, "discount swap" refers to an exchange or trade that involves a deduction or reduction in value or price.
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