Swap Transactions Research Articles

Bidirectional Nanoparticle Crossing of Oil-Water Interfaces Induced by Different Stimuli: Insight into Phase Transfer

Swap transactions: Bidirectional spontaneous transfer of gold nanoparticles coated with stimuli-responsive polymer brushes across oil–water interfaces has been implemented (see picture). The water-to-oil transfer of the gold nanoparticles is dictated by the ionic strength in water, while the nanoparticle oil-to-water transfer occurs only when the environmental temperature is reduced below 5 °C. Detailed facts of importance to specialist readers are published as ”Supporting Information”. Such documents are peer-reviewed, but not copy-edited or typeset. They are made available as submitted by the authors. Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.

Withholding Tax on Total Return Swap Transactions

Withholding Tax on Total Return Swap Transactions

Estimating Endogenous Liquidity Using Transaction and Order Book Information

We distinguish exogenous liquidity, which corresponds to the variability of bid-ask spreads for usual-sized transactions, from endogenous liquidity, which we interpret as the impact of liquidity on market prices when liquidating larger positions. Endogenous liquidity measures the risk that the realized price of a transaction may be different from the price before the transaction. We apply an endogenous liquidity-based model to order books and credit default swap (CDS) transactions in order to understand two different phenomena. An order book of equity prices has been utilized so as to reveal any 'not yet realized' endogenous liquidity effects, i.e. any effects that become real if a new order is executed. Our results indicate that measuring the impact of the endogenous liquidity on the valuation of the portfolio is quite realistic. Second, we apply our model to a set of CDS transactions in order to find a 'realized' endogenous liquidity component. We conclude that a realized systemic component is not present in realized CDS transactions, probably due to placing of iceberg orders, simply by slicing the large transactions into several small pieces to avoid liquidity constraints: Traders know perfectly where endogenous liquidity starts when they execute their transactions.

Staff Analysis of Market Data Related to Credit Default Swap Transactions

Staff Analysis of Market Data Related to Credit Default Swap Transactions

An Analysis of CDS Transactions: Implications for Public Reporting

Ongoing regulatory reform efforts aim to make the over-the-counter derivatives market more transparent by introducing public reporting of transaction-level information, including price and volume of trades. However, to date there has been a scarcity of data on the structure of trading in this market. This paper analyzes three months of global credit default swap (CDS) transactions and presents findings on the market composition, trading dynamics, and level of standardization. We find that trading activity in the CDS market is relatively low, with a majority of reference entities for single-name CDS trading less than once a day. We also find that a high proportion of CDS transactions conform to standardized contractual and trading conventions. Examining the dealer’s role as market maker, we find that large trades with customers are generally not rapidly offset by further trades in the same reference entity, suggesting that hedging of large positions, if taking place, occurs over a longer time horizon. Through our analysis, we provide a framework for regulators and policymakers to consider the design of the public reporting regime and the necessary improvements to data collection to facilitate meaningful price reporting for credit derivatives.

FX Swaps: Implications for Financial and Economic Stability

The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country's financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.

FX Swaps: Implications for Financial and Economic Stability

The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country's financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.

An Update on China's Derivatives Market

China9s derivatives market has undergone a relatively quiet phase in the past year, in contrast to the “great leaps forward” in 2004, when the China Banking Regulatory Commission allowed banking institutions to trade a wide range of derivatives, and in 2005, when the People9s Bank of China liberalized the conduct of domestic currency forward and swap transactions. Today, the Chinese derivatives market is still in its infancy, and most products available are still quite “low tech.” However, recent developments in other related areas appear to foretell that the market may undergo further, though gradual, development and advancement. This article looks at three sectors of the Chinese derivatives market: cross-border derivatives transactions conducted under the qualified domestic institutional investors (“QDII”) scheme, the domestic inter-bank market, and the domestic exchange market. It also examines the impact of the two latest key regulations on derivatives transactions in China: the PRC Enterprise Bankruptcy Law (which only became effective on June 1, 2007) and the revised Interim Measures on the Administration of Derivatives Transaction Business of Financial Institutions (which only became publicly accessible on the CBRC website at the end of July 2007). <b>TOPICS:</b>Derivatives, emerging

Modelling the supply chain swap problem in the petroleum industry

This paper is motivated by the need for developing well-structured methodologies and mechanisms that enable an efficient coordination of swap/exchange transactions among same-level supply chain partners in the petroleum and energy industries. A mathematical model that can capture the complexity in the swap transactions between two companies is presented. The model is then applied to a real case study from the petrochemicals industry, and the solutions of the model are evaluated and their performances are compared to those of current industry practices.

Investigation for Synthetic Collateralized Debt Obligation

Recently, domestic market participants have a growing interest in synthetic Collateralized Debt Obligation (CDO) as a security to reduce credit risk and create new profit. Therefore, the valuation method and hedging strategy for synthetic CDO become an important issue. However, there is no won-denominated credit default swap transactions, which are essential for activating synthetic CDO transaction‘ In addition, there is no transparent market information for the default probability, asset correlation, and recovery rate, which are critical variables determining the price of synthetic CDO. This study first investigates the method of estimating the default probability, asset correlation coefficient, and recovery rate. Next, using five synthetiC CDO pricing models‘ widely used OFGC (One-Factor Non-Gaussian Copula) model. OFNGC (One-Factor Non-Gaussian Copula) model such as OFDTC (One-Factor Double T-distribution Copula) model of Hull and White (2004) or NIGC (Normal Inverse Gaussian Copula) model of Kalemanova et al.(2005), SC&lt;Stochastic Correlation) model of Burtschell et al.(2005), and FL (Forward Loss) model of Bennani (2005), I Investigate and compare three points: 1) appropriateness for portfolio loss distribution, 2) explanation for standardized tranche spread, 3) sensitivity for delta-neutral hedging strategy. To compare pricing models, parameter estimation for each model is preceded by using the term structure of iTraxx Europe index spread and the tranch spreads with different maturities and exercise prices Remarkable results of this study are as follows. First, the probability for loss interval determining mezzanine tranche spread is lower in all models except SC model than OFGC model. This result shows that all mαdels except SC model in some degree solve the implied correlation smile phenomenon, where the correlation coefficient of mezzanine tranche must be lower than other tranches when OFGC model is used. Second, in explaining standardized tranche spread, NIGC model is the best among various models with respect to relative error. When OFGC model is compared with OFDTC model, OFOTC model is better than OFGC model in explaining 5-year tranche spreads. But for 7-year or 10-year tranches, OFDTC model is better with respect to absolute error while OFGC model is better with respect to relative error. Third, the sensitivity sign of senior tranctle spread with respect to asset correlation is sometime negative in NIG model while it is positive in other models. This result implies that a long position may be taken by the issuers of synthet.ic COO as a correlation delta-neutral hedging strategy when OFGC model is used, while a short position may be taken when NIGC model is used.

US legal and regulatory developments: Validity of Commodity Futures Trading Commission's Policy Statement concerning swap transactions reaffirmed; CFTC Reauthorization Act of 2005

US legal and regulatory developments: Validity of Commodity Futures Trading Commission's Policy Statement concerning swap transactions reaffirmed; CFTC Reauthorization Act of 2005

Loan Portfolio Swaps and Optimal Lending

Theories on loan portfolio swap hedging are based on a portfolio-choice approach. This paper presents an alternative: a firm-theoretic model for bank behavior with loan portfolio swaps. Our paper derives the optimal loan rate and rate-taking loan amount of the bank’s portfolio, and relates them to the market loan rate, counterparty loan rate, swap default risk, capital-to-deposits ratio, and deposit insurance. We find that in the bilateral default risk approach, the comparative static results are generated by four factors: the bank’s risk magnitude about the equity market value, loan composition in the swap contract, the substitution effect in the loan portfolio, and the income effect from the swap transaction. The results imply that changes in the payoff asymmetry in the event of swap default and the bank’s regulatory parameters have a direct effect on the bank’s loan portfolio for lending and swap transactions.

Pricing Swap Credit Risk with Copulas

We apply copula functions to evaluate counterpart risk in swap transactions. Using copulas allows to generalise the approach proposed by Sorensen and Bollier (1994), allowing for dependence between swap rates and counterparty default. Counterpart risk is represented by a sequence of vulnerable swaptions, which are priced using Cherubini and Luciano (2002) approach. Using copulas grants maximum flexibility with the choice of term structure and default risk models, as well as with the specification of the dependence structure between interest rate and credit risk. Closed form hedging and pricing formulas are derived for extreme dependence cases and for copula functions of the Frechet family. An empirical application based on actual market data has shown that dependence affects both the level and the slope credit spreads, particularly for the case in which a credit institution is paying fixed. The effect is reversed in the case in which the financial institution pays floating.

An empirical test of agency cost reduction using interest rate swaps

This paper tests a model based on Wall's (Wall, L., 1989. Journal of Banking and Finance 13, 261–270) hypothesis of agency cost reduction using interest rate swaps. We find a significant positive relationship between the risk of the firm and the reduction of agency costs measured by the continuously compounded excess return (CAR) of the firm. Our findings are consistent with Wall’s hypothesis and other theories of swap transactions and in explaining the existence and growth of the swap market.

Financial engineering in Islamic finance

AbstractThe objective of this article is to examine the scope of financial innovation and engineering within an Islamic financial system. The article concludes that, contrary to common belief, Islamic finance provides the basic building blocks that can be used to construct more complex instruments that will enhance liquidity and offer risk management tools. With the introduction of asset securitization and swap transactions conforming to Islamic principles, the issues of secondary markets and risk management can be addressed. The first section discusses the significance of innovation in Islamic financial markets. The second section discusses the process of introducing new products in the market and their scope. The third section illustrates an Islamic form of asset securitization as an example of financial engineering. The fourth section evaluates the structure of a commodity swap transaction to determine its validity. And finally, the fifth section concludes the discussion. © 1999 John Wiley &amp; Sons, Inc.

Bankers Trust Company and Bankers Trust International plc v PT Jakarta International Hotels &amp; Development

During the course of 1997 Bankers Trust International plc (BTI) and the defendant company, PT Jakarta International Hotels &amp; Development (JIHD), entered into a series of seven Indonesian rupiah/US dollar cross‐currency swap transactions. The seven transactions were made under the auspices of an International Swaps and Derivatives Association (ISDA) master agreement dated 9th March 1995. That ISDA master agreement was expressed to be governed by English law and contained an arbitration clause which provided (inter alia):

Restitution–Mistake of Law–Reform in Haste, Repent at Leisure

In Kleinwort Benson v. Lincoln City Council [1998] 3 W.L.R. 1095 the House of Lords heard consolidated appeals arising out of the failure of interest rate swap transactions entered into between various banks and local authorities. Having paid out considerable sums under the swap arrangements, the banks were disconcerted to find them declared ultra vires and void (Hazell v. Hammersmith and Fulham L.B.C. [1992] 2 A.C. 1). The Lords have now held that sums paid by the banks may be recovered back, by action in restitution for mistake. In so holding, they have abrogated the rule that a mistake of law is not actionable, and denied (at least on these facts) any defence that the parties acted on the basis of “settled law”.

Debt-for-nature swaps: an overview

SUMMARY The debt crisis of developing countries in the early 1980s has been linked with environmental degradation. In order to combat the debt and environmental crisis, debt-for-nature swap transactions were proposed by Lovejoy in 1984. They involve a mechanism of exchange in which a certain amount of the debtor's foreign debt is cancelled or forgiven, in return for local currency from the debtor government to be invested in a domestic environmental protection project. The swaps may involve two governments, and in most cases, are aided by an International Non-Governmental Organization (INGO), who must have a local contact with a domestic NGO. The first swap (1987), between Bolivia and Conservation International (US-INGO) involved cancellation of $650 000 Bolivian foreign debt for exchange of $100 000 worth of local currency to be used towards the Beni Biosphere Reserve. Since 1987, swaps have resulted in an excess of US$1.5 billion in transactions. Debt-for-nature swaps may not provide debt relief of significant magnitude nor solve the world's environmental or conservation problems, they have enabled provision of additional funding to ailing environmental organizations (more than $100 million), raised a sense of awareness about environmental protection, and some environments especially in Costa Rica are benefiting from the process.

Derivatives Regulation and Financial Management: Lessons from Gibson Greetings

M On April 19, 1994, Gibson Greetings, Inc. (Gibson), a manufacturer of seasonal cards, wrapping paper, and related products with headquarters in Cincinnati, Ohio, filed an 8-K with the SEC, announcing that it had taken a $16.7 million charge against first quarter income resulting from losses on two swap transactions with BT Securities Corporation, a subsidiary of Bankers Trust New York Corporation (BT). The announcement stated that this loss was in addition to a

Capital adequacy guidelines and interest rate swaps

The paper investigates the empirical implications of the capital adequacy guidelines on interest rate swaps. First, it provides stylized estimates of the likely rates of return on equity that can be achieved on interest rate swap transactions under different assumptions of intermediation fees, risk weights and swap maturities. Second, using data of daily swap spreads we explore the potential profitability of various trading strategies in interest rate swap interbank market. Implications for swap intermediaries and corporate users are discussed.