Accrual Swap

AAA

DEFINITION of 'Accrual Swap'

A form of discrete time-switch option in which the interest on one side accrues only if certain conditions are met. Payment of interest in the accrual swap occurs if the reference rate, such as LIBOR or EURIBOR, is above or below a certain level. One party pays the standard floating reference rate, and in turn receives the reference rate plus a spread. Interest payments to the counterparty will only accrue for days in which the reference rate stays within a certain range.

INVESTOPEDIA EXPLAINS 'Accrual Swap'

Investors and companies utilizing accrual swaps assume the risk that the reference rate will stay in a certain range. The broader the lower and upper cap, the greater the risk that the reference rate will fall within this range, which is typically what is desired since interest will not be accrued.


For example, a company with a floating-rate obligation denominated in euros wants to hedge its exposure by paying a fixed rate which is below the market rate. The floating rate is conditional on how many days EURIBOR is within an agreed upon range during a set period. The goal of the company is to obtain a lower fixed rate by assuming the risk that the EURIBOR rate will fall outside of the agreed upon range.

RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Range Accrual

    A form of interest accrual in which the coupon rate is only earned ...
  3. Euro Interbank Offer Rate - EURIBOR

    The rates offered to prime banks on euro interbank term deposits. ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
RELATED FAQS
  1. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  2. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  3. How can I calculate the Macaulay duration of a zero-coupon bond?

    The funds from operations is a measure of the amount of cash flow that a business's operations generates. Real estate investment ... Read Full Answer >>
  4. How does an entrepreneur choose a business structure?

    Swaps are derivative contracts between two parties that involve the exchange of cash flows. Interest rate swaps involve exchanging ... Read Full Answer >>
  5. When was the first swap agreement and why were swaps created?

    Swap agreements originated from agreements created in Great Britain in the 1970s to circumvent foreign exchange controls ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
Related Articles
  1. Options & Futures

    An Introduction To Structured Products

    Learn a simple way to bring the benefits of derivatives into your portfolio.
  2. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  3. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  4. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  5. Options & Futures

    Volatility - The Birth Of A New Asset Class

    Learn more about the trading possibilities with the VIX.
  6. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  7. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  8. Mutual Funds & ETFs

    Top Skills Hedge Funds Look For In Job Candidates

    Lucrative salary, high perks, and best quantitative brains at work. What are the top skills a candidate needs to get a job at a hedge fund?
  9. Mutual Funds & ETFs

    Why Hedge Fund Managers Make Good Advisory Clients

    Super-busy hedge fund managers should be viewed as an opportunity for sophisticated financial advisors who can step in and offer their services.
  10. Professionals

    A Look at How the Ultra-Wealthy Invest

    Ultra-wealthy investors are cautious this year as they approach the markets. Many target mutual funds and stocks, but most also diversify their portfolios.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center