Fixed-For-Fixed Swaps


DEFINITION of 'Fixed-For-Fixed Swaps'

An arrangement between two parties (known as counterparties) in which both parties pay a fixed interest rate that they could not otherwise obtain outside of a swap arrangement.

BREAKING DOWN 'Fixed-For-Fixed Swaps'

To understand how investors benefit from these types of arrangements, consider a situation in which each party has a comparative advantage to take out a loan at a certain rate and currency. For example, an American firm can take out a loan in the United States at a 7% interest rate, but requires a loan in yen to finance an expansion project in Japan, where the interest rate is 10%. At the same time, a Japanese firm wishes to finance an expansion project in the U.S., but the interest rate is 12%, compared to the 9% interest rate in Japan.

Each party can benefit from the other's interest rate through a fixed-for-fixed currency swap. In this case, the U.S. firm can borrow U.S. dollars for 7%, then lend the funds to the Japanese firm at 7%. The Japanese firm can borrow Japanese yen at 9%, then lend the funds to the U.S. firm for the same amount.

  1. Dual Currency Swap

    A currency swap used to hedge the risk associated with the issuance ...
  2. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  3. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  4. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  5. Fixed-For-Floating Swap

    An advantageous arrangement between two parties (counterparties), ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
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