Development of the CDS Market
Impact of the Credit Crisis on the CDS Market
Reform of CDS Contracts
Globalization of Swap Markets
Currency Swaps
Key Concepts
1. Remind students as to how interest rate movements can adversely affect the performance of various
financial institutions.
2. Describe how financial institutions participate in swap markets.
3. Explain in general terms how interest rate swaps can hedge interest rate risk.
4. Identify the various types of interest rate swaps, and the advantages of each.
POINT/COUNTER-POINT:
Should Financial Institutions Engage in Interest Rate Swaps for Speculative
Purposes?
POINT: Yes. They have expertise in forecasting future interest rate movements and can generate gains for
their shareholders by taking speculative positions.
COUNTER-POINT: No. They should use their main business to generate gains for their shareholders.
They should serve as intermediaries for swap transactions only to generate transaction fees, or take a
position only if it is to hedge their exposure to interest rate risk.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: Either argument has some validity. There is risk from speculating in interest rate swaps. A
financial institution could incur losses from its speculative positions, which may offset some or all of its
gains from its other operations. In addition, its credit rating may be reduced if it takes excessive risk.