The federal government's use of interest rate swaps and currency swaps

A swap agreement is a contract in which two counterparties arrange to exchange cash-flow streams over a period of time according to a pre-arranged formula. There is no exchange of principal in an interest rate swap, but a principal payment is exchanged at the beginning and upon maturity of a currenc...

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Bibliographic Details
Published in:Bank of Canada Review 2000-12, p.23
Main Authors: Kiff, John, Uri, Ron, Shafiq Ebrahim
Format: Article
Language:eng ; fre
Subjects:
Advantages
Agreements
American dollar
Central banks
Cost control
Credit risk
Currency
Economic policy
Federal government
Fixed rates
Foreign exchange rates
Interest rate swaps
LIBOR
Valuation
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Summary:A swap agreement is a contract in which two counterparties arrange to exchange cash-flow streams over a period of time according to a pre-arranged formula. There is no exchange of principal in an interest rate swap, but a principal payment is exchanged at the beginning and upon maturity of a currency-swap agreement. The Government of Canada has been using interest rate swaps to help manage its foreign currency liabilities since fiscal 1984/852 and its Canadian-dollar liabilities since 1987/88. This article describes the characteristics of swap agreements and the motivation behind the federal government's use of these transactions. The valuation of swap agreements and the government's management of credit-risk exposure are also examined, together with the manner in which swap transactions are undertaken to satisfy the government's various objectives. Finally, the article illustrates the cost-effectiveness of the federal government's use of swap agreements.
ISSN:0045-1460