Talk:Swap (finance)

Move

I moved some things between this and interest rate swap.--Jerryseinfeld 21:45, 31 Dec 2004 (UTC)

Ideas for improving

-Credit default swaps aren't technically swaps, probably should be deleted — Preceding unsigned comment added by 66.83.26.10 (talk) 21:07, 11 December 2011 (UTC)

why not? Two streams of income for a period, looks like a swap to me.--Hroptatyr (talk) 02:58, 10 December 2019 (UTC)

- As someone new to the notion of swaps ... I find this entry incredibly abstruse. Can someone please take this and make it more palatable to a non-business person? --Ahaeg 22:02, 6 July 2007 (UTC)

a typical "investment" is your gamble if you imagine yourself to be a better-than-the-crowd judge of what is likely to happen as planned. A swap is what you would offer to another party, if you want to gamble that you are a better-than-the-crowd judge of what is likely to go wrong. —Preceding unsigned comment added by 121.97.59.62 (talk) 02:57, 23 January 2010 (UTC)

No, you're describing a short sale. (I'm not sure where swaps fit into that metaphor.) --Quuxplusone (talk) 20:47, 21 May 2013 (UTC)

Don't see a problem with that, the thing is it's not just words it's putting your money where your mouth is. Assuming you're not infinitely rich you can only wager so many times.--Hroptatyr (talk) 03:00, 10 December 2019 (UTC)

The article has been through considerable revision over the years. Anyone still feel that any section of the article is abstruse? Nshuks7 (talk) 08:49, 14 February 2009 (UTC)

-:Honestly, yes. The problem lies in the introductory paragraph, which doesn't do its job of telling a novice reader who is coming in just what a swap is in laymen's terms. They need to read until at least the interest rate swap paragraph, which is too abstruse for the casual reader. I would say that we should make this introduction more clear considering the tremendous novice interest generated in financial markets and products by the present economic situation and because wikipedia is meant to be an encyclopedia. In the first sentence as it is written, understanding the relevant linked articles (derivative, exchange, and cashflows) does not help the reader understand a swap. The offending line is "exchange one stream of cash flows against another stream". It should probably read something like "The swap is a derivative in which two counter parties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. Specifically, they agree to exchange one stream of cash flow against another stream." This still includes the more accurate technical description of swaps, while helping novice readers with a more easily understood description of swaps. Unless anyone objects, I'll make this change. If anyone can simplify my line and make it even more clear to a novice reader, that would be even more appreciated.

- The table showing the notional amounts of the swaps is actually showing the notional amounts of all interest rate contracts. I don't have the skills to change it but someone should. (e.g. Dec 2006 outstanding interest rate swaps was 230 trillion dollars, not 292. -iikka 14:19, 31 July 2006, (EET)

A real example would be very very educational

Here's why. Take this sentence:

The swap is a derivative in which two counter parties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. Specifically, they agree to exchange one stream of cash flow against another stream.

Now redefine some words: party=event where children celebrate a birthday with cake and icecream. derivative=dy/dx. counter party: a party in a supermarket at the checkout area. Instrument: a piece of electronics, like a voltmeter. Stream/Flow: moving water. Benefits: when you get reimbursed for your root canal. NOw those two sentences are totally incomprehensible; think of this target audience for the introduction.

A bad example: Say for instance two counterparties want to exchange certain benefits... just as incomprehensible as the original cuz it uses the same abstract words. Good examples need specifics that people can relate to (well knownn companies and cities and real person's names).

A better example: Pat, an older investor, has stock in Apple Corporation that pays dividends like $2000 or $5000 per year, but it varies every year, and Pat wants a more steady stream of cash. Sandy, a younger investor, is willing to take risks, but has a lot of money in New York municipal bonds, which pay the same $3200 per year, every year. Pat and Sandy sign a Swap contract so Pat gets Sandy's $3200/year and Sandy gets Pat's $2000 to $5000/year, even though they still own their original investments.

OK maybe that's a stupid swap, but that's my understanding given the intro paragraph. 99.203.237.33 (talk) 20:43, 22 April 2010 (UTC)

Your example doesn't explain why Pat and Sandy don't simply exchange their actual investments (i.e., Pat buys Sandy's bonds at market price, and then Sandy buys Pat's stocks at market price). Why is a new instrument required? (I don't know the answer myself.) --Quuxplusone (talk) 20:47, 21 May 2013 (UTC)

The example is okayish. One should definitely use OTC instruments instead of stocks and bonds. The reason why the swap is needed is precisely because you cannot just sell on your OTC instrument because it's a contract between you and some counterparty, and yet you want to change the cash stream. Think of a personal loan between you and your bank you can't just sell that on to somebody because the agreed upon rate was tailored to your credit rating. Hroptatyr (talk) 14:47, 4 December 2019 (UTC)

And in conclusion then...

The above discussions highlight perfectly the insanity of the world of casino banking: None of you seem to be able to come to an agreement on what a swap is (at best) or even have the faintest idea of what they are (at worst). And to think that this nonsense was only invented in 1981!... I'll put mine on the 3:30 at Cheltenham (or whatever).1812ahill (talk) 19:17, 31 October 2012 (UTC)

Furthermore, does anyone have up-to-date numbers on the size of the market? 15 years (since 2006) is a long time to not measure a volatile asset.72.174.131.123 (talk) 04:48, 21 November 2021 (UTC)

Former content

This is a theoretical argument against IRS markets, in particular it concludes that the market is incomplete:

In an efficient market without barriers to capital flows, the cost-savings argument through a QSD is difficult to accept. It implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments. If the QSD is one of the primary reasons for the existence of interest rate swaps, one would expect arbitrage to eliminate it over time and that the growth of the swap market would decrease. Thus, the arbitrage argument does not seem to have much merit. Consequently, one must rely on an argument of market completeness for the existence and growth of interest rate swaps. That is, all types of debt instruments are not regularly available for all borrowers. Thus, the interest rate swap market assists in tailoring financing to the type desired by a particular borrower. Both counterparties can benefit (as well as the swap dealer) through financing that is more suitable for their asset maturity structures. Hroptatyr (talk) 02:52, 10 December 2019 (UTC)