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International Financial Management
Notes A benchmark rate, therefore, plays an important role in the growth and development of the
interest rate swap market. The Reserve Bank of India has permitted counterparties to use any
domestic interest rate as the benchmark, provided it is market determined, transparent and
mutually acceptable.
Did u know? The Mumbai Inter-Bank Offered Rate (MIBOR) being compiled by Reuters
and the National Stock Exchange, has been used as benchmark in all the interest rate swap
deals reported so far.
Caselet SBI-HUDCO Enter into Yen-swap Deal
S tate Bank of India has entered into a long-term Rupee-Yen swap deal with Housing
and Urban Development Corporation (HUDCO).
According to a press release, HUDCO has swapped its foreign currency liability of Yen
2.89 billions for equivalent Rupee resources with SBI for a tenor of 10 years. Under the
arrangement, HUDCO will deposit its Yen with SBI on the day of transaction, and SBI in
return will pay the equivalent Rupee resources to HUDCO.
According to officials, the swap will be done at the prevailing exchange rate on the day of
the transaction. And HUDCO will use the rupee resources for the purpose of lending to
their projects in India. The overseas branches of SBI in Japan will use Yen to fund their own
assets. As per the swap agreement, SBI would provide the long-term hedge to HUDCO for
a period of 10 years to cover the exchange risk of the foreign liability.
As a result of this, the swap will neutralize both the exchange rate risk and interest risk of
HUDCO on Yen loan by converting the Yen flows into risk neutral-fixed interest rate
Rupee flows for the company. At the end of 10 years, HUDCO will take back the Yen by
giving the Rupee equivalent to SBI.
Earlier SBI had struck a Rupee-Dollar swap of sizable transaction with ICICI. At present,
the bank is considering similar deals with companies, which do not have international
presence to manage the foreign currency risk effectively.
The bank is actively involved in developing the derivative market in India by facilitating
the use of hedging instruments such as currency swaps. This has been possible after the
permission was granted by the Reserve Bank of India to enable corporates to obtain
suitable hedge for their exposures arising out of their foreign currency loans.
Source: International Financial Management, Madhu Vij, Excel Books.
Self Assessment
State whether the following statements are true or false:
7. The first interest rate swap appeared in London in 1982.
8. An interest rate swap is a financial contract between two parties exchanging or swapping
a stream, of interest payments.
9. Interest rate swaps are a type of derivatives.
10. In forward swaps commencement date is set at a future date.
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