What is swap?

What is swap and how does it affect our trading?

 

A swap is a derivative, usually comprised of two legs. Common ones include interest rate, fx rate, or total return swaps. It impacts trading because it can increase the amount of leverage in the system.

 

https://www.forextime.com/education/forex-videos/what-is-swap

 

https://www.investopedia.com/terms/s/swap.asp

A classic example for a swap is an interest rate swap. For example, I have a bond portfolio with fixed interest rates. I dont like this and would prefer variable rates, but I dont want to sell my whole bond portfolio.

So I exchange my fixed interest rate for your variable interest rate. Based on the discounted cash flows of your future payment streams and my future payment streams the value of the Swap is calculated.

Swaps never affected my trading in any way.

 

A Credit Default Swap (CDS) is actually a bet on whether an issuer will default on its debt obligation. Sounds a lot like "insurance", doesn't it. Well, that's because it is. They couldn't call them "insurance contracts" without having to comply with insurance regulations... so they call them swaps. See how that works out?

Unless you're actually trading CDS contracts, there's no direct impact on your trading.

 

Many swap!

- Interest rate swap
- Constant maturity swap
- Amortizing swap
- Basis swap
- Credit default swap
- Variance swap
- Forward swap
- Currency swap
- Quanto swap
- Commodity swap
- Total return on swap
- Inflation swap
- Equity swap
- Range accrual swap
- Option on swap (swaption)

If trade swap, affect trading!
If not trade swap, not so much

GAT

 

%%
UDOW/ top 10 holdings =248%;
Industrial Average Swap, Citibank =50.86%
Industrial Average swap, UBS=49.58%
Industrial Average Swap, BAC=29.47%
Industrial Average Swap, MS= 7.89%....................................................

 

The easy definition is a covered call is loosely a swap. You trade one asset call for another. Call get's exercised you've traded equity and swapped into cash

 

If it increases the amount of leverage then how much leverage should be good?

 

It's not good or bad but if you see leverage rising to very high levels, you will know that a move down in prices will result in a lot of pain as levered traders unwind positions or blow up.