May Yongjoo Song / Ewha GSIS

 A derivative in which two parties agree to exchange periodic payments  Payments  Calculated over a notional principal amount,notional principal amount, which is not exchanged between counterparties  The amount each counterparty pays to the other = periodic rate x notional amount (principal) 2

 A plain vanilla fixed-to-floating interest rate swap  Party A: periodic interest payments to party B  variable interest rate (reference rate) of 1-year Treasury security (=5%)  Party B: periodic interest payments to party A  fixed rate of 8% Notional amount = $100 mil. Payments A: $100 mil. x 5% = $5 mil. B: $100 mil. x 8% = $8 mil. 3

 To hedge risks or to speculate on changes in the expected direction of underlying prices  Portfolios of forward contractsforward contracts  Two parties enter into multiple forward contracts  Traded over-the-counter(OTC), "tailor-made" for the counterparties 4

 Classified based on the characteristics of the swap payments  Unlimited types of swaps can be derived CurrencyPayment Base Interest Rate SwapSameFixed interest rate and floating interest rate (reference rate) Interest Rate-equity SwapSameInterest rate and return of equity index Equity SwapSameEquity index Currency SwapDifferentCurrency 5

 Ewha Bank raises $100 mil. for 3 yrs at a fixed rate of 8%, then lends it to Ohmydocs.com for 3 yrs at LIBOR +250 basis points  Ewha Bank makes a swap contract with Yonsei Bank for 5 yrs with $100 mil. Yonsei pays 7.5% of $100mil. and Ewha pays LIBOR +100 basis points Net Effect on Ewha Bank ①LIBOR LIBOR +100 = 150 basis points (1.5%) ②7.5% - 8% = - 0.5%  Net spread of 1% regardless of how LIBOR changes 6

 Ohmydocs.com issues a $100 mil. 5 yr bond at R of S&P points using STCM as the underwriter  Ohmydocs.com enters into a 5 yr, $100 mil. interest rate- equity swap with STCM at 7.9%. STCM pays S&P points to Ohmydocs.com Net Effects ①Ohmydocs.com: Net interest cost = 7.9% ②Institutional investors can buy a bond tied to the performance of common stocks  Structured notes: debt instruments using swaps 7

BenefitsCounterparty Risks To reduce the risks by fixing the interest/exchange rate To gain no-risk or arbitrage profits To lower the interest/exchange rate Possibility of the other party’s default Flexibility of swap  Customized risk management through creating various swap products 8

 Korea-China currency swap  12. ’08: $4 bil. $30 bil.  Some amount will be allocated to US$  Korea-Japan currency swap  12.‘08: $13 bil. $30 bil.  Maturity: Apr. Oct  Korea-US currency swap  10. ‘08: $30 bil. on discussion to expand  Maturity: Apr. Oct