What Is a Rollercoaster Swap?

A rollercoaster swap is a seasonal interest rate swap where the payments can be adjusted to best meet the counterparty's cyclical financing needs.

Key Takeaways

  • A rollercoaster swap features a flexible payment schedule in order to smooth cyclical or seasonal financing needs.
  • A rollercoaster swap allows the time (tenor) between regular payments to be extended or shortened in order to match seasonally fluctuating cash flows.
  • The size of a rollercoaster swap's notional amount is adjustable, although the net present value (NPV) of the transaction remains unchanged.
  • A firm can use a rollercoaster swap to roll unrealized profits or losses forward or backward.
  • The rollercoaster swap is also known as an accordion swap, concertina swap, or NPV swap.

Understanding Rollercoaster Swaps

A rollercoaster swap has fluctuating, or adjustable, payment terms so that each counterparty can match cash flows to transfers, periodic financing obligations, or seasonal factors. The benefit of a rollercoaster swap lies in the fact that it is a seasonal swap. This allows the counterparty to tailor the payment streams to meet their financing needs throughout the year, which can be crucial when sales revenues alone are not sufficient to meet these requirements.

An international company that sells lawnmowers, for example, might have a keen interest in a rollercoaster swap because it can match swap payments with the seasonal demand for lawnmowers, which arises primarily in the summertime and wanes in the winter. Likewise, a clothing company that specializes in ski wear and winter clothes would face the opposite seasonal fluctuations and may prefer to match its cash flows accordingly.

Unlike regular interest rate swaps, a rollercoaster swap allows the time between regular payments (known as the swap's tenor) to be extended or shortened in order to match seasonally-fluctuating cash flows. Additionally, the size of the notional amount is adjustable, although the net present value (NPV) of the transaction remains unchanged.

Special Considerations

A rollercoaster swap allows a firm to roll unrealized profits or losses forward or backward. Therefore, due to accounting and taxation implications, many banks maintain special approvals, rules, and limits for the use of such products, which means that these products may not be appropriate and/or available for all users. Independent tax and accounting advice should be sought before using them.

The rollercoaster swap is also known as an accordion swap, concertina swap (typically in reference to currency swaps), or NPV swap.

Example of a Rollercoaster Swap

Here is a more concrete example: A company has a $100 million pay-fixed swap on its books, with a final maturity in seven years at a rate of 8.00%. The current seven-year swap rate is 8.75%, so the swap is in-the-money (ITM) by 75 basis points (BPS) per year. Using a rollercoaster swap, there are several adjustments that the firm can implement. It might, for instance:

  • Shorten the swap to three years, and increase the size to $260 million, maintaining the rate of 8.00%, below the three-year rate of 9.10%
  • Shorten the swap to three years, and increase the size to $350 million, and also increase the rate to 8.25%
  • Lengthen the swap to 10 years, maintain the size at $100 million, but reduce the rate to 7.75%, below the 10-year rate of 8.25%

The important point is that the net present value of the swap before and after the changes must remain the same, therefore the range of possibilities are numerous but, at the same time, are constrained by the original NPV.