How do I use a rollercoaster swap?

By Richard Wilson AAA
A:

A rollercoaster swap is the name for a swap (the exchange of one security for another) with a notional principal that differs during various payment periods. In other words, it is a swap agreement in which counterparties agree to a flexibility of payments.

This type of swap is most often used by counterparties with cyclical financial obligations. These counterparties rely on the fluctuating payments of this swap type in order to match cash flows to transfers, periodic financing obligations, or seasonal factors.

A company that manufactures winter coats, for example, may prefer a rollercoaster swap because of the flexibility that is allowed during the times of year when people do not buy winter coats. In addition, the manufacturer in this example would favor the ability to pay the swap payments during winter. A rollercoaster swap is a favorable alternative for companies with a cash flow that changes on a seasonal basis.

To learn more about swaps, see An Introduction To Swaps.

This question was answered by Richard C. Wilson.

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