Monday, July 28, 2014

Learn About Total Return Swaps, Interest Rate Swaps and Asset Swaps (Videos)

With all the talk about total return swaps these days, this video by Rahul Soni explains everything you need to know about these opaque over-the-counter derivatives.


Recent articles on total return swaps:
Shorting Junk Loans Just Got Easier as New Derivatives Unveiled (Bloomberg)
Goldman to sell up to €10bn bonds with new swap (Financial Times)
Goldman blurs lines with structured bond (Reuters-6/27/14)

Rahul Soni also made a video on interest rate swaps and asset swaps. It looks complicated. According to the Bank for International Settlements, at the end of 2013, the notional amount of interest rate swap contracts outstanding totalled $461 trillion, and the notional amount of OTC derivatives outstanding totalled $710 trillion.
The interest rate segment accounts for the majority of OTC derivatives activity. For single currency interest rate derivatives at end-December 2013, the notional amount of outstanding contracts totalled $584 trillion, which represented 82% of the global OTC derivatives market (Table 3). At $461 trillion, swaps account for by far the largest share of outstanding interest rate derivatives.

Source: BIS OTC derivative statistics for December 2013


Related: Learn Discounted Cash Flow Analysis, More Layoffs Coming At Banks (Khan Academy video)

The problem is there is still very little transparency in the over-the-counter derivatives game. Credit default swaps were 50% of the reason why the financial system collapsed in 2008, and now it looks like total return swaps are starting to hide risk in the system. Good luck financial system.

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