What are swap rates?
A swap rate is the interest rate differential that is embedded in a currency’s trade. In line with the first definition, an AUD swap rate is the interest rate differential that is embedded in the trade of the Australian Dollars (AUD). In other words, an AUD swap rate is the rate of the fixed leg of a swap as it is determined by its particular market. In an interest rate swap, it is the fixed interest rate exchanged for a benchmark rate such as LIBOR plus or minus a spread. It also deals with the association existing between the fixed portions of a currency swap.
The swap between interest rates is one of the most highly traded derivative products existing in the Australian financial market with a $10 trillion in notional value transaction in 2013 alone. The delivery swap futures (DSF) contracts are an innovative set of products which are closely matching the characteristics of OTC interest rate swaps.
With a closely matching calculation methodology and trading convention of the Australian market, DSF allows for the replication of three months forward at the money fixed for floating interest markets which is integrated with ASX’s OTC cleaning service.
The benefits of the AUD swap rate are that it offers customers an improved capital and margin efficiencies in comparison with OTC equivalents. This is also coupled with the advantages of exchange-traded markets which include reduced price transparency, counterparty risk, and centralized clearing.
LIBOR is the key interest rate benchmark for the major world currencies including the British pound and the U.S dollars. Over a month ago from the time of writing this, some serious questions about the sustainability of LIBOR were raised. The major problems identified were that there were no enough transactions in the short-term wholesale funding market for the banks to anchor the benchmark. Several banks that make submissions used for the calculation of LIBOR were uncomfortable about continuing with it as they mainly rely on their expert judgment in determining where the LIBOR should rather be than on actual transactions.
AUSTRALIAN INTEREST RATE SWAP FUTURES
A three AUD swap rate as shared by Quandl is summarized below.
(YS): n.a. (n.a.) as of 23-Nov-2017
Name Symbol Exchange Months Category Price Change
3-year Australian Interest Rate Swap YS ASX HMUZ Rates 97.76
The 3-year Australian Interest Rate Swap Futures are traded on the Australian Securities Exchange. Each contract is for A$ 100,000 of 3-year Australian Interest Rate Swap. Prices are quoted in Yield percent per annum in multiples of .0005%.
3-year Australian Interest Rate Swap Futures contracts exist for the months of March (H), June (M), September (U) and December (Z). The deliverable product for the 3-year Australian Interest Rate Swap Futures contract is swap based on a 6.5% coupon and a term to maturity of three years.
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