SWAP
Swap is a contract between two parties to exchange periodic payments within agreed time line. Swap includes the contracts of exchanging baskets of securities or commodities. Concept of swap is simple; it’s no more complicated than swapping things among two parties. If one has commodity A and don’t need and other one have B commodity but not required. The best solution would be to exchange or swap these two commodities at reasonable predetermined price.
Example:
AAA bank has structure that is liability sensitive (means liabilities are re-priced faster than its assets). Because duration of its deposits is shorter than it’s loan duration. It leads to mismatch between its assets and liabilities.
To balance this mismatch, AAA Bank may
Swap is a contract between two parties to exchange periodic payments within agreed time line. Swap includes the contracts of exchanging baskets of securities or commodities. Concept of swap is simple; it’s no more complicated than swapping things among two parties. If one has commodity A and don’t need and other one have B commodity but not required. The best solution would be to exchange or swap these two commodities at reasonable predetermined price.
Example:
AAA bank has structure that is liability sensitive (means liabilities are re-priced faster than its assets). Because duration of its deposits is shorter than it’s loan duration. It leads to mismatch between its assets and liabilities.
To balance this mismatch, AAA Bank may