I was wondering if someone could help me out with a question. I work for an asset management company. Recently the traders opened a new interest rate swap. It was done in INR but is NDS (meaning all payments are made in USD) We are receiving fixed and paying float. What confuses me though is that the fixed rate is around 5.88 and the floating (MIBOR) was around 7.93 when it was opened. I don’t think there are any upfront payments with IRS so how could the NPV of this swap be 0? I would think that if we are receiving less than we are paying initially then we would be losing on the deal to start out with. Is there something I am missing with non-deliverable IRS?
Does India have an exchange rate target? If they do they could use the interest rate to affect the exchange rate. So maybe the INR is expected to appreciate, therefore the Indian central bank will bring rates down to make INR assets less attractive and cause the currency to depreciate. I don’t know anything about the Indian Central Bank. I didn’t even know what MIBOR was until I looked it up but this explanation I think is plausible.
cfamd: is the floating rate taken to be MIBOR? based on past experience on India deals, floating rate is taken to be bank’s (in ur case, whoever the counterparty is) internal cost of funding, or in some cases, the prime lending rate (PLR) for that period.
from my experience with these swaps, the floating rate is usually set to LIBOR +/- spread for credit. what you need to consider here as well is the exchange rate on the deal is set at inception and that there is a maturity cash flow of principal (all in USD… i.e. the INR side gets converted at maturity in to USD and a net payment is made).