Basis-Only Swap in financial industry refers to a type of interest rate swap, where the underlying asset is the difference between the fixed and floating payments received. It is basically a financial contract that allows two parties to exchange streams of interest payments. The structure of this swap is similar to the generic interest rate swap, except that there is no exchange of the notional amount.
In a basis-only swap, one party agrees to pay the other party the floating rate, usually based on an index such as the LIBOR, plus or minus a spread, and the other party agrees to pay a fixed rate for the same term that is equal to the floating rate plus or minus a basis point adjustment. For example, if LIBOR is at 2% and the spread is 20 basis points, then the floating rate would be 2.2% and the other party would be paying the 2.2% to the payer.
Basis-only swaps provide some unique benefits to the financial industry. It allows market participants to take advantage of discrepancies between different financial markets, by exploiting the difference between the yields of two benchmark interest rates. This type of swap is typically used for hedging purposes and risk management.
Additionally, basis-only swaps help in providing liquidity in the financial markets. Basis swaps are useful in order to provide a nuanced view of the market and help market participants find new sources of liquidity according to their asset allocation and risk management strategies. Thus, basis-only swaps are an effective tool to manage interest rate risk and generate additional returns in a diversified portfolio.
Basis-Only Swap
Financial Term
Basis-Only Swap in financial industry refers to a type of interest rate swap, where the underlying asset is the difference between the fixed and floating payments received. It is basically a financial contract that allows two parties to exchange streams of interest payments. The structure of this swap is similar to the generic interest rate swap, except that there is no exchange of the notional amount.
In a basis-only swap, one party agrees to pay the other party the floating rate, usually based on an index such as the LIBOR, plus or minus a spread, and the other party agrees to pay a fixed rate for the same term that is equal to the floating rate plus or minus a basis point adjustment. For example, if LIBOR is at 2% and the spread is 20 basis points, then the floating rate would be 2.2% and the other party would be paying the 2.2% to the payer.
Basis-only swaps provide some unique benefits to the financial industry. It allows market participants to take advantage of discrepancies between different financial markets, by exploiting the difference between the yields of two benchmark interest rates. This type of swap is typically used for hedging purposes and risk management.
Additionally, basis-only swaps help in providing liquidity in the financial markets. Basis swaps are useful in order to provide a nuanced view of the market and help market participants find new sources of liquidity according to their asset allocation and risk management strategies. Thus, basis-only swaps are an effective tool to manage interest rate risk and generate additional returns in a diversified portfolio.