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The European Journal of Applied Economics

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2406-2588
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The Pricing and Valuation of Swaps

Jelena Paunović
Published Online: 2013-10-12 | DOI: https://doi.org/10.5937/sjas1301039p

Abstract

Swaps are financial agreements between two parties to exchange period cash flows and are mostly used as a tool for hedging risk and speculation. They are derivative contracts that derive their value from an underlying asset (the most common underlying assets are the interest rates in the plain vanilla case, but it can be almost anything). These OTC products (over the counter) are traded directly between the two parties or with a financial institution acting as an intermediary. Some banks in Serbia already offer these derivative instruments, but the markets are still in an emerging phase. The private sector is severely affected by credit and interest rate risk which currently lacks sufficient knowledge and understanding of such products and their importance. This paper aims to present and demystify the structure of these financial derivatives by presenting their valuation methods and by showing how they are used in practice. Ultimately, we shall discuss the credit risk the counterparties are facing in developed financial markets nowadays.

Rezime

Svopovi su finansijski ugovori izmeu dve strane za razmenu tokova novca razlicitog porekla i koriste se uglavnom kao sredstvo za upravljanje rizikom (hedžing) i spekulacije.To su derivatni instrumenti cija se vrednost izvodi iz osnovne aktive (najcešci tip je genericki svop ili ‘vanila kamatni svop’, ali to može biti skoro bilo šta). Ovim OTC (vanberzanskim) proizvodima se trguje nesposredno izmeu dve strane ili sa finansijskom institucijom koja nastupa kao posrednik. Pojedine banke u Srbiji vec nude ove derivatne instrumente, ali je njihovo korišcenje na tržištu još uvek u zacetku. Kreditni rizik i rizik kamatne stope u velikoj meri uticu na privatni sektor koji trenutno ne poseduje dovoljno znanja o takvim proizvodima i njihovom znacaju. Cilj ovog rada je da pokuša da prikaže i razjasni strukturu ovih finansijskih derivata tako što predstavlja metode za njihovo vrednovanje i pokazuje kako se one primenjuju u praksi. Na samom kraju ovog rada cemo se pozabaviti pitanjem kreditnog rizika sa kojim se ugovorne strane danas suocavaju na razvijenim finansijskim tržištima.

Keywords: swaps; financial derivatives; OTC market; hedging; risk; speculation; financial markets

Ključne reči : svopovi; finansijski derivati; OTC (vanberzansko) tržište; hedžing; rizik; spekulacije; finansijska tržišta

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About the article

Published Online: 2013-10-12

Published in Print: 2013-04-01


Citation Information: Singidunum Journal of Applied Sciences, ISSN (Online) 2217-8783 , DOI: https://doi.org/10.5937/sjas1301039p.

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