Circus Swap

DEFINITION of 'Circus Swap'

A combination of an interest rate swap and a currency swap in which a fixed-rate loan in one currency is swapped for a floating-rate loan in another currency. A circus swap therefore converts not just the basis of the interest rate liability, but also the currency of this liability. The floating rate in a circus swap is generally indexed to U.S. dollar LIBOR. The term is derived from the acronym CIRCUS, which stands for Combined Interest Rate and Currency Swap. Also known as a “cross-currency swap” or “currency coupon swap".

BREAKING DOWN 'Circus Swap'

Companies and institutions use circus swaps to hedge currency and interest rate risk, and to match cash flows from assets and liabilities. They are ideal for hedging loan transactions since the swap terms can be tailored to perfectly match the underlying loan parameters.

As an example, consider Euromax, a European company that has a US$100 million loan with a floating interest rate (LIBOR + 2%) on its books. The company is concerned that U.S. interest rates may begin to rise, which would lead to a stronger U.S. dollar against the euro, making it more expensive to make future interest and principal repayments. Euromax would therefore like to swap into a fixed-rate loan in Japanese yen, because interest rates in Japan are low and it believes the yen may depreciate against the euro. It therefore enters into a circus swap with a counterparty that converts its U.S. dollar floating-rate debt into a fixed-rate loan in Japanese yen. If the company’s views on future interest rates and currencies are correct, it can save a few million dollars on servicing its debt obligations over the loan's term.  
 

RELATED TERMS
  1. Cross-Currency Swap

    An agreement between two parties to exchange interest payments ...
  2. Asset Swap

    Similar in structure to a plain vanilla swap, the key difference ...
  3. Swap Bank

    A financial institution that acts as an intermediary for interest ...
  4. Delayed Rate Setting Swap

    An exchange of cash flows, one of which is based on a fixed interest ...
  5. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
  6. Rate Anticipation Swap

    A type of swap in which bonds are exchanged according to their ...
Related Articles
  1. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. Managing Wealth

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  3. Investing

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  4. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  5. Markets

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  6. Investing

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  7. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  8. Managing Wealth

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  9. Trading

    Understanding Total Return Swaps

    A total return swap is a contract in which a payer and receiver exchange the credit risk and market risk of an underlying asset.
  10. Trading

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
RELATED FAQS
  1. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  2. What are the benefits of engaging in a currency swap?

    Read about the benefits of engaging in a currency swap, such as when companies in different countries want to borrow funds ... Read Answer >>
  3. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  4. Do interest rate swaps trade on the open market?

    Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>
  5. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
  6. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center