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. Foreign Currency Swap

    An agreement to make a currency exchange between two foreign ...
  2. Swap

    A derivative contract through which two parties exchange financial ...
  3. Swap Bank

    A financial institution that acts as an intermediary for interest ...
  4. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  5. Delayed Rate Setting Swap

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

    An individual who acts as the counterparty in a swap agreement ...
Related Articles
  1. Investing

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  2. Markets

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  3. Investing

    What Warren Buffet Calls "Weapons of Mass Destruction": Understanding the Swap Industry

    A full analysis of how the swap industry works.
  4. Investing

    Interest Rate Swaps Explained

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

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  6. Managing Wealth

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  7. 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.
  8. 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.
  9. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  10. Markets

    Currency Swap Basics

    A currency swap involves two parties exchanging a notional principal and interest to gain exposure to a desired currency.
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. 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 >>
  3. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  4. 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 >>
  5. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  6. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center