What is a 'Basis Rate Swap'
A basis rate swap is a type of swap in which two parties swap variable interest rates based on different money markets. This is usually done to limit interestrate risk that a company faces as a result of having differing lending and borrowing rates.
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BREAKING DOWN 'Basis Rate Swap'
For example, a company lends money to individuals at a variable rate that is tied to the London Interbank Offer (LIBOR) rate but they borrow money based on the Treasury Bill rate. This difference between the borrowing and lending rates (the spread) leads to interestrate risk. By entering into a basis rate swap, where they exchange the TBill rate for the LIBOR rate, they eliminate this interestrate risk.
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