What Is a Mounted-for-Floating Trade?
A collection-for-floating exchange is a contractual affiliation between two occasions during which one party swaps the interest cash flows of fixed-rate loan(s) with those of floating-rate loan(s) held by means of each and every different party. The vital of the underlying loans is no longer exchanged.
Key Takeaways
- A collection-for-floating exchange occurs when one party swaps the interest cash waft of a fixed-rate loan with those of a floating-rate loan held by means of each and every different party.
- Doing the exchange reduces interest expense by means of swapping for a floating value if it is lower than the fixed-rate in recent years being paid.
- A collection-for-floating exchange means that you can upper are compatible assets and liabilities which could be refined to interest rate movements.
Working out Mounted-for-Floating Trade
There are a few main motivations for a loan holder to execute a fixed-for-floating exchange:
- Cut back interest expense by means of swapping for a floating value if it is lower than the fixed-rate in recent years being paid;
- Upper are compatible assets and liabilities which could be refined to interest rate movements;
- Diversify risks in a whole loan portfolio by means of exchanging a portion of a difficult and speedy value to floating value; and/or
- Perform a financial hedge with an expectation that market interest rates will decline.
Example of a Mounted-for-Floating Trade
Think Company X carries a $100 million loan at a difficult and speedy value of 6.5%. Company X expects that the total trail of interest rates over the with reference to or intermediate-term is down. Company Y, dressed in a $100 million loan at London Interbank Offered Fee (LIBOR) + 3.50% (floating value loan), has the opposite view; it believes interest rates are on the rise. Company X and Company Y wish to exchange. With the fixed-for-floating exchange Company X will pay the floating value, and thus get advantages if actually interest rates drop, and Company Y will assume expenses for the fixed-rate loan. Company Y will stand to be told if interest rates upward push. Trade transactions are facilitated by means of a transformation dealer, who will act as the desired counterparty for a fee.
