Faiz swapı ve Türk bankacılık sektörü açısından bir değerlendirme
Approach of interest rate swaps in Turkish banking sector
- Tez No: 74139
- Danışmanlar: PROF. DR. NAZIM EKREN
- Tez Türü: Yüksek Lisans
- Konular: Bankacılık, Banking
- Anahtar Kelimeler: Belirtilmemiş.
- Yıl: 1998
- Dil: Türkçe
- Üniversite: Marmara Üniversitesi
- Enstitü: Bankacılık ve Sigortacılık Enstitüsü
- Ana Bilim Dalı: Bankacılık Ana Bilim Dalı
- Bilim Dalı: Belirtilmemiş.
- Sayfa Sayısı: 118
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Özet (Çeviri)
SUMMARY APPROACH OF INTEREST RATE SWAPS IN TURKISH BANKING SECTOR I ) SWAPS AND DEFINITIONS A - Definition Swap means the bilateral exchange of a currency, interest rate on financial debt, asset or product. But more detailed definition is different companies have various creditability in financial sector and two parties of swap transaction get advantage of using the difference of these creditability. Interest rate swap is arbitrage opportunities in credit markets are traditionally thought to provide the incentive to swap interest rates. These opportunities arise from firms' abilities to exploit quality spread differentials in available rates for long versus short term debt when companies have different credit risk characteristics. Each firm profits from its comparative advantage in credit markets by participating in an interest rate swap and obtaining a lower initial interest rate than it could achieve independently. B - The First Applications of Swaps Parallel and back to back loans started before 1980 and they are premature of swap transactions. Contemporary swaps came from these transactions, their advantages was kept and disadvantages were eliminated. B - 1 Parallel Loans Parallel loans involve two entities, with headquarters in different countries, each having subsidiaries in the other's country, and each having mirror-image liquidity positions and financing requirements. 99In parallel loan, the parties agree to the exchange of principal on the value date. During the life of contract, each pays the interest on the currency it has received. At the maturity, the principal is exchanged and the contract is terminated. B - 2 Back to Back Loans Back to back loan is an arrangement under which two companies in different countries borrow each other's currency and agree to repay the loans at a specified future date. Back to back loans are directly arranged between two parent companies in different countries (there is no subsidiary) and structured under one agreement. The main reasons of back to back loans are to avoid exchange control, higher cost of independent borrowing by each firm and tax avoidance. B -3 The Modern Role of Parallel Back to Back Loan Structures Despite its structural obsolescence parallel bans, in particular, continue to enjoy a secular role in the context of freeing blocked funds. Harking back to its original rationale of bypassing exchange controls, parallel loans continue to be used to circumvent exchange restrictions in countries which do not allow the free transfer of capital across its boundaries. C - Currency Swaps Parallel and back to back loans were recorded as two separate transactions. This treatment ignored the contingent nature of the loans. It inflated the balance sheet and distorted the accounting ratios that were use in analyzing the financial healthy of banks. The problem facing banks was how to preserve the cash flow structure of these loans and, in the meantime, eliminate their drawbacks. The answer was currency swaps. Currency swap is simultaneously buying and selling foreign currencies. It is used by firms which trade internationally to minimize the risk of losses arising from exchange rate changes. Common currency swap has got three steps. 1001. Two borrowers who need different currencies, exchange the principal amounts of the loan. 2. During currency swap transaction, two sides exchange the interest payments. 3. At the maturity two sides exchanged the principal amounts. Currency swaps have got two types according to maturity: Short and long term swaps. Although long term swaps(2-5 years) do not apply too much short term swaps use so common in Turkish Banking System. Short term currency swaps use mainly for liquidity management. Other forms of currency swaps are spot and forward swaps. Spot currency swaps' first leg are done in spot market. However forward swaps contracts' first leg involve a forward purchase and buy. E - Interest Rate Swaps Interest rate swaps have fixed termination dates and typically provide for semiannual payments. Either interest rate in a swap may be fixed or floating - The amount of interest paid is based on some agreed upon principal amount, which is called notional principal because it never actually changes hand. Interest rate swaps serve to transform the effective maturity of two firms' assets and liabilities. This type of swap enables firms to choose from a wider variety of asset and liability markets without having to incur additional interest rate risk. F - Equity Swaps Equity swaps, in their simplest form, involve the exchange of some floating interest rate (usually Libor) and an index (possibly plus a spread). These arrangements can involve payments in any currency regardless of the underlying index. Thus, Japanese Libor could be swapped against a return linked to S&P 500. G - Commodity Swaps Traditionally, anyone who needed to hedge commodity prices had only one hedging vehicle which is futures. Futures markets, although opening up a whole. new avenue for those who wished to protect themselves against fluctuations in the prices of physical commodities, had 101some limitations and disadvantages, such as amount and time standardization. Commodity swaps developed a new and improved hedging instruments for commodities. Especially for oil, gold, aluminum, nickel and copper. Commodity swaps is a hedging vehicle which is used for commodity risk management in favor of end users and producers. H - Function of Swaps Swap transactions have two major economic functions :. to provide a vehicle for market linkage, integrating global capital markets; and. to allow.greater efficiency in the management of interest rate and currency exposures. Swap transactions provide a classical bridge between markets, integrating different types of financial instruments, such as fixed and floating interest rates, and also linking various global capital markets. This market linkage drives largely from the fact that swaps allow the extension of the theory of comparative advantage from the commodity and service markets to world's capital markets. I - The Structure of Swaps Swap contract hasn't got any standardization and it is a privately negotiated. As such, the terms and conditions of the swap contract can be customized to meet the needs at hand. Swaps involve the buying and selling of different currency cash flows in the future, each respective sale is being contingent upon the other. This is an important point as it distinguishes a currency swap from a loan and, by definition, being a forward conditional commitment makes its a contingent obligation therefore an off-balance sheet item. The currency swap structure is very similar to that of an interest rate swaps as described above. The major difference relates to the need to exchange principal amounts at the need to exchange principal amounts at the commencement and conclusion of a transaction. 102n ) DE VELOPMANT OF SWAP MARKETS A - Beginning of Swaps First swap transaction was held in the Central Bank of Austria in 1923. CBA. sold local currency against pound at spot and sold pound against local currency at forward. But this transaction hasn't got any influence of the contemporary swap market. As a result of exchange controls in UK. parallel and back to back loans were arranged, ultimately in 1976 Continental Illinois Limited and Goldman Sachs arranged first currency swap, between Bos Kalis Westminister (Dutch) and ICI Finance (British) involving NLG and GBP. In 1981 The World Bank and IBM were arranged currency swap transaction that gave the market the legitimacy and impetus it needed to attract other credit worthy participants. The first interest rate swaps were also undertaken in 1981, initially by Citibank and Continental Illinios which included a number of private transactions culminating in 1982. B - The Factors Effecting of Swap Market Development The increase in the volatility of interest rates which took place in the late 1970s and the 1980s had its roots in the world economic events occurring in prior decades. A major example is the demise in the early 1970s of the international payments system established by the Breeton Woods international monetary conference in 1944. Under Breeton Woods system, the United States had maintained the dollar at fixed rates of exchange with other currencies. After 1971, floating exchange rates were accompanied by increased volatility in interest rates since governments often acted to control exchange rates by manipulating interest rates. C - Improving of Global Swap Markets, Size and Position of Interest Rate Swaps In the beginning the market was quite awkward because the swaps were done on a completely matched basis. Because there was no hedging, just matching the two transactions was not completed with the ease or timely that we see in the marketplace today. There was also no standardization, of documentation, and each party had its own means and techniques for evaluating the creditworthiness of the potential counterparty. 103In United States after bankers met the hedging techniques, arranging banks take mismatched position in the swap market which means storing swaps. In storing method, arranging banks deal swap to clients without find any matched transactions in order to close their swap position in the future. But at the same time they hedge their position through treasury and futures markets. In the late 1980s activity in interest rate swaps denominated in currencies other than U.S dollars took a giant leap forward. In 1987, roughly 75 percent of new interest rate swaps were denominated in US. Dollars. By 1989, this percentage dropped to 65 percent and six months later, it approached 50 percent. This figure indicate a tremendous. growth in total interest rate swaps. As a matter of fact, total interest rate swap activity more than doubled between 1987 and 1989. Interest rate swap activity increased another 50 percent in 1990, while currency swap activity was up another 33 percent. By 1991 interest rate swaps activity jumped over 3 trillion US. Dollars. In 1992 as.a result of credit crunch swaps activity decreased unexpectedly. D - International Swaps Derivatives Association In may 1985, ISDA was formed by representatives from several international market participants active in swap market. The formation of ISDA and the work it has done are one of the primary reasons that the market has matured to the point it has and is as liquid as it is. m ) STRUCTURE AND TYPES OF INTEREST RATE SWAPS A - Applications Understanding of interest rate swap is important to know its parameters. These parameters impact the cash flow : Effective date, maturity date, notional amount, index, rate, reset frequency and payment frequency. Effective date is a time to start swap transaction. Interest accruals in a swap can start immediately or sometime in the future. If the effective date is one to two business day after the trade date, the trade is a spot swap, and both fixed and. If the effective date is sometime in the future, the variable rate is unknown and the swap is a forward swap. 104Maturity date is a time expired which used be one of the fixed parameters. But that is no longer true. Maturity date can be extended or shortened, also limits the upside profit potential by making available to the other party the option to terminate the contract. The notional amount of a swap corresponds to the principal of the debt or asset the swap is completing. If the principal amount is fixed for the life of the loan, the swap's notional amount is also constant during the contract. If the principal of the varies, then the swap's notional amount will also vary. Floating leg of swap is calculate according an index, that is generally Libor sometimes can be Prima rate or FED funds rate. The swap rate refers to the fixed rate of interest in a swap. This is also known as a swap price, coupon and swap strike. Swap rate has two components. One is treasury bonds and other is spread. The treasury changes constantly as the market moves. Spread can be different on different swap desks. Rate reset frequency for instance, the three month Libor is reset every three months. CP and Fed funds are reset every day, and since swap parties do nor exchange payments each day, swaps based on these reset more frequently than they pay. Such swaps might be compounding. Payment frequency of swaps is usually set between one month and one year. One can play with this and create interesting types of swaps. B TYPES OF SWAPS B-l Fixed to Fixed This kind of swaps is not ordinary in the market also its structure is not convenient for interest rate swaps. But this swap can be use for unwinding swap transaction. 105B-2 Fixed to Floating Two counterparty exchange interest payments fixed against floating on notional amount. This can be in the same currency or different currency. If they are based on different currencies this types of swap called circus swap. This kind of swap is useful when managing both currency risk and interest rate risk simultaneously. In the early days, swaps were stand alone products. They were usually not directly tied to a financing or asset. This kind of swaps called plain vanilla or coupon swaps. Now many swaps use for managing liabilities and assets. B - 3 Floating to Floating This swap is called basis which entails two floating rate indexed. An example is when Libor interest payments are swapped against interest payments based on CP rate index on the same notional principal amount. C - Derivatives of Swaps C - 1 Forward Rate Agreement An FRA is an agreement in respect of forward interest rates between two parties who wish to protect themselves against a future movement in interest rates. The parties involved agree on an interest rate for specific period of time from a specified future settlement date based on agreed principal amount. The buyer is the party to FRA wishing to protect itself against future rise in the relevant interest rate. The seller is the party to the FRA wishing to protect itself future fall in the relevant interest rate. C - 2 Cap, Floor and Collar They are series of option on interest rates. Each contract has a strike price, a reset date (on which option expires and the rate for new period ). and a maturity date. 106An interest rate cap is an agreement between the seller or provider of the cap and a borrower to limit the borrower's floating rate a specified level for a period time. In each reset period, if the index is above the strike rate, the seller of the cap pays the buyer the difference between index and strike. If the index is below the strike rate that option expires worthless. A floor is opposite of a cap agreement. A floor is between seller or provider and an investor which guarantees that the investor's floating rate of return on investments will not fall below a specified level over an agreed period of time. A collar is combination of cap and floor. The seller or provider of the collar agrees to limit the borrower's floating interest rate to a band limited by a specified cap rate and floor rate. If market rates exceed the specified cap rate, collar provider will make payment to the buyer sufficient to bring its rate back to the cap. If market fall below the floor, the borrower makes payments to the collar provider its rate hack to the floor. C -3 Swaptions Swaptions are options on swaps. They are the over the counter contracts for entering into swap transactions with preset fixed rates sometime in the future. They follow options conventions and have a trade date, a strike price, and an expiration date by which the option must be exercised. The option to receive the fixed rate is the put swaptions, the option to pay the fixed rate is the call swaptions. IV ) FINANCIAL FEATURES OF INTEREST RATE SWAPS A - Reasons of Interest Rate Swaps Why do two firms agree to swap interest payment in the market ? There are three main reasons to do it which are comparative advantage, information asymmetry and quality spread differential. A - 1 Comparative Advantages The market linkage derives largely from the fact that swaps allow the extension of the theory of comparative advantage from the commodity and service markets to the world's capital 107markets. The theory of comparative advantage in trade states that each party should specialize in the production of those goods for which it has a relative comparative advantage. Having done so, the parties can exchange those goods through trade for mix of commodities and hence increase their welfare beyond that which would have been possible had they attempt to provide for all their commodity needs directly. A - 2 Information Asymmetry Participants of financial market have different expectations. This expectations come from having different information. Actually if market participants had been same expectations the market would have stopped. For interest rate swaps, parties of transactions have different expectations on market. Some of them think that interest rates go down but at the same time others think opposite. A - 3 Quality Spread Differential A quality spread is the difference between the interest rate paid for funds of a given maturity by a high quality firm and that required of a lower quality firm. The quality spread differential is the difference in quality spreads at two different maturities. B - Major Purposes of Using Interest Rate Swaps 1. To hedge, or to modify for risk management purposes, a genuine existing or future expected asset or liability. This is the most straight forward case and is the most common use of swaps. 2. To sculpt an existing cash flow to desired structure. This application is similar to hedging. 3. To capture value in the market. To capture value mean is to decrease the effective interest cost on a borrowing or increase the realized yield on an investment. 4. To access, synthetically, markets otherwise not easily or efficiently accessible. 5.“ To improve the cosmetics of a transaction. In this application, optional characteristics are usually employed. C - Risks of Interest Rate Swaps Interest rate swaps have two broad categories, namely, transaction risks and market risks. Transaction risk contains credit and documentation risks which arise from specific trade 108parameters and are different in individual cases. Market risk comprises interest rate risk, mismatch risk and basis risk. Market risks are inherent in the marketplace and are independent of individual trade characteristics. C - 1 Transaction Risk Transaction risks are difficult to quantify but must nevertheless be taken into consideration in trading swaps. a Credit Risk : Credit risk occurs because either party may default on a swap contract. The maximum amount of the loss associated with this credit risk is measured by the swap's replacement cost of entering into a new swap under current market conditions with rates equal to those on the swap being replaced. b Documentation Risk : Documentation risk occurs when swap agreement has done and documentation is not clear and certain enough. Uncertainty or absence of documentation may result in discrepancies. One of the counterparty on the swap transaction can misuse discrepancy of the documentation and cancel the swap. Market participants should use the ISDA master agreement not to occur documentation risk. Market participants use what 's referred to as the ISDA master and negotiate only a schedule. C - 2 Market Risk Market risks can control and diversify by the trader. Because they are part of the market. a Interest Rate Risk : Interest rate risk is the risk of change in the yield curve from a given, base position. In fixed income product, interest rate risk is risk of adverse movement in rates that could affect the value of fixed income assets or liabilities. 109b Basis Risk : Basis risk is to the risk of change the difference between on various index. Basis risk is present in basis swaps in which both legs are based on variable indices. c Mismatch Risk : Mismatch risk or reset risk is the risk of change in the term structure of rates between a cash inflow and outflow that unfavorably affect an investment This risk also arises form an imperfect hedge and is present in the gap period between the resetting of two instrument. D - Pricing A holder of a security needs to know its market value to determine the profit or loss to come from selling the security. The market value of. any security is the measure of its profitability. In interest rate swaps, this value assumes an additional importance by being the measure of the counterparty credit limit. In the banks, additionally, the market value of the jswap portfolio enters into capital adequacy calculations. Calculating the value of interest rate swaps is a mathematical procedure and is based on bond valuation models. D - 1 Input The input to the swap valuation model is the market data. The market data consists of the yields of contract that provide benchmark rates for different maturities. First will be considered is what rates to select. The maturity of interest rate swap can be 1 to 20 years. We need to construct a yield curve that covers the range of the swap's cash flows. Generally treasury market is used to calculate to swap's cash flow present value. D - 2 Process The processing part of the swap valuation models has two components. 1. Processing the input data. 2. Applying the processed input to the structure of the swap 110a Far Method : The par method considerably simplifies yield curve analysis by disregarding the wealth of information in the curve. In the par method, a single discount rate is applied to all cash flows. In the other word, the par method assumes a horizontal yield curve regardless of the true shape of the yield curve in the market. b Zero Coupon Method : The zero coupon method looks at each cash flow whether single or part of a series of flows as a zero coupon bond. The most important result, of such a treatment of cash flows is that a different discount factor is applied to each flow, and since discount factors are obtained from the market., the zero coupon method in fact takes into account the shape of the yield curve. D - 3 Normalizing Input In selecting rates, we saw that input points for the yield curve are obtained from different contracts in Eurodollars and Treasuries, These contracts form different in terms of their day count basis and frequency of interest payments. We have to account for these difference. First, we look at the day count basis. All market rates are expressed in terms of annual percentage points. But definition of annual varies such as 365 for Treasury contracts 360 for futures market. Second, we look at compounding. Treasuries pay interest semiannually and eurodollar contracts assume annual payments. D - 4 Determining the Shape of the Yield Curve Some rates needed for calculating its cash flows which will not be directly available in the market. These must be calculated from available data. To calculate discount rate from available data has two mathematical methods which are linear interpolation and polynomial interpolation. D - 5 Output 111The market value of an interest rate swap is the net present value (NPV) of its cash flows. In the NPV method the PV. of two legs of the swap are compared against each other. The NPV is the difference between the PV of the pay side and receive side. NPV (swap) = PV (receive) - PV (pay) From the assumptions of the NPV, it follows that the value of a swap at the time of trade must be zero. F - P&L of Interest Rate Swaps P&L of swaps can be measured by one of three methods. 1. Accrual method : The time value of the flows is ignored. Instead, each day, a portion of the nature cash flow is recognized as the income and expense of the transaction. 2. Cash method : The NPV of swap acts as the measure of its P&L. Each day, a new market value is calculated based an current market rates. 3. Modified cash method : Future cash flows on both legs of swap are balanced by subtracting from the PV. of each side the accrued interest for that side since the last payment. V ) CURRENT SITUATION AND FUTURE DEVELOPMENTS OF INTEREST RATE SWAPS IN TURKISH BANKING SECTOR A - Leading Application of Swaps First swap transactions started between the Central Bank of Turkey and commercial banks in Turkey, according to CB.T.'s legislation in 16 July 1985, According to this local currency could exchange for foreign currency until one month. Öne of this applications has been done by the Turkish Development Bank. The Turkish Development Bank in 1989 issued 10 year bond in Japanese Market. They wanted to place their extra JPY on TL and solved the problem through swap transaction with C.B.T. ?$”?* ii2.-_J;:>''The Central Bank of Turkey issued notice in 27 September 1985 which allowed currency forward until three months. Thus FX-TL and -FX-FX swap transaction began until three months in Turkish Banking Sector. 1992 this allowance was extended until one year. In Turkey the cheapest fund was available in Japanese credit market during 1991 when Ankara Municipality issued 8.5 billion 5 year bond in Japan, and swapped it into USD through Mutsui Toiye Kobe Bank Currency swap has got a big fractions in all swaps. In Turkey total notional amount of interest rate swaps is not accessible, therefore we can't estimate percentage of interest rate swaps out of total swaps. But interest payment and income is available which has been increasing gradually since 1996. B - Situations of Financial Instruments in Turkey Interest rate swaps can be based on several instruments that are bond, commercial paper, asset backed securities, government sector borrowing and bank debentures in Turkish Financial Market. Just bond can be asset for interest rate swaps, others hasn't got enough liquidity. 113However because of the budget deficit, Turkish Government is the biggest firnd demander (bond issuer). Therefore treasury bonds have got high yield and liquidity also these bonds are various types. Treasury bonds are fixed and floating rate. Floating rate bonds are indexed inflation. Accounting and valuation standards was determined by Turkish Banks Committee. C - Analyzing on Turkish Applications Interest rate swaps should analyze in three aims, TL-TL, TL-FX and FX-FX. Chronic high inflation and instability are the main character of Turkish economy. In this situation long term cash flows are nearly impossible on TL. Also there is no index which represent borrowing in Financial sector. Inflation is not a suitable index for borrowing. These main reasons are the obstacles on TL-TL interest rate swaps. Nevertheless TL-FX swaps can be for short term as used be in 1985. FX-FX swap are using in Turkish Banking Sector but that is not enough. Because Turkish banking sector 7.4 billion dollar foreign bans which are based on LIBOR and FIBOR. This is the high interest rate risk for the sector. Turkish banks generally don't carry this risk, they load it on their clients. 114 ??İg^-t&F
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