Swaps in Structured Funding

Swaps are essential components of almost all securitisation and covered bond structures, though they play their role very much behind the scenes. This chapter explains the different purposes and functions that swaps have in structured funding deals and the different types of risk this brings home to the swap provider. It presents the foundational aspects of plain vanilla swaps for readers from a non-derivatives background. An interest rate swap is an agreement where one counterparty agrees to pay a specified interest rate on a notional principal schedule at regular intervals. There are two common types of interest rate swaps: fixed/floating swap and single currency basis swap. A cross-currency swap is analogous to an interest rate swap. There are three types of principal cash flows that occur during the life of a cross-currency swap: initial principal exchange; intermediate principal exchanges and final principal exchange.