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    Thread: What is breakeven Asset Swap Spread and where it is used?

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      Default What is breakeven Asset Swap Spread and where it is used?

      What is breakeven Asset Swap Spread and where it is used?


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      Breakeven Asset Swap Spread: It refers to the net present value of all of the cash flows generated by the underlying asset equal to par. To calculate the breakeven asset swap spread the net cash flow value set to zero. This is used in the Bonds market as there is need of such complex calculations. From the perspective of the asset swap seller, they sell the bond for par plus accrued interest. The net upfront payment has a value 100 – P where P is the full price of the bond in the market. Both parties to the swap are assumed to be AA bank credit quality and so these cash flows are priced off the Libor curve. We cancel out the principal payments of par at maturity, and after applying the formula we get the exact results. Other than bond market it is not being used even retail investors are not using such calculations in most of the cases this is used by asset management companies.


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      In structure, an asset swap is similar to a simple vanilla swap, the key difference being the basis of the swap contract. Instead of exchanging regular fixed and floating credit rates, fixed and floating assets are exchanged.All swaps are derivative contracts through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount agreed upon by both parties. As the name suggests, asset swaps involve an actual asset exchange instead of just cash flows.Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter contracts between businesses or financial institutions.Asset swaps can be used to transform the cash flow characteristics of the underlying asset in order to hedge currency, credit and/or interest rate risks, or creating a synthetic investment with more suitable cash flow characteristics. Typically,an asset swap involves transactions in which the investor acquires a bond position and then enters into an interest rate swap with the bank that sold him/her the bond. The investor pays fixed and receives floating. It is widely used by banks to convert their long-term fixed rate assets to a floating rate in order to match their short-term liabilities (depositor accounts).Another use is to insure against loss due to credit risk, such as default or bankruptcy, of the bond's issuer. Here, the swap buyer is also buying protection.


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      Break Even asset Swap Spread :
      Is A Derivative Contract Made Between Two Parties Allows The Investor To Hedge Away a Breakeven Exposure By Having Two Legs of Cash Flow Paying Out On Maturity and these Two legs of Cash Flow Paying are :
      - The Total Return On The Inflation Index .
      - A Compounded Fixed Breakeven Rate .
      So That Type Of Swap Has Two Leg One Leg Is The Traditional Floating Leg Which Based On Floating Interest Rate and One Is The Traditional Fixed Leg Which Based On an Agreed Fixed Rate Of Interest, The Fixed Rate Is Called The Breakeven Swap Rate So Based on Time And Inflation Period The Payments From Both Legs Imagine the Difference Between Actual And Expected Inflation So :
      - The Buyer Earns More : If Actual Inflation Rate Exceeds Expected Inflation .
      - The Buyer Earns Less : If Actual Inflation Rate Became Less Than Expected Inflation .

      Example For Clarification :
      If Some One Has To Pay a Liabilities For The Coming Year On A nominal Value Of one Million Dollar Based On The Variable Rate Of Interest In The Country He Can Go To Bank To Make A Breakeven Swap By Supposing That He Will Pay To Them A Fixed Interest Rate At The End Of The Year On One Million If They Accept To Pay Him Back A Variable Rate Of Interest On One Million So Now There is an Advantage To Break even Swap Because The Risk of Variable Interest Rate Now Passed To Bank And He Will Pay The Interest Rate Based On A Fixed Interest Rate To The Bank Only .


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      The plain vanilla swap has the structure with an asset swap but with a difference of being the basis of the swap contract. Fixed and floating assets are being traded rather than regular fixed and floating interest rates being swapped.
      All swaps are contracts which are being derived through which financial instruments can be exchanged by two parties. These financial instruments can be currencies, stocks or any type of security. The fact is that Swaps are not traded on exchanges, and smaller investors are generally not into swaps. Therefore, swaps are off-exchange contracts between financial institutions.
      Break even swap enables investors to hedge against any exposure to inflation. It can also be known as a zero-coupon swap.


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      Default

      Every trader who trades in the forex market will immediately face the spread. However, there are only a few reviews about the use of spreads and their overall impact on traders. In this article, we will review what spread is and its role in forex trading.

      If we look at forex quotes or prices, it is usually always followed by a bid and ask value. Spreads are the difference between the selling price (bid) and the buy value (ask) or sell quotes and buy quotes. This spread is the income earned by the broker where when we sell, the spread will be charged between 2 points to tens of points depending on the pair used. The amount of spread varies in each pair. For the same pair the spread given can vary between one forex broker and another broker. There are forex brokers who use fixed spreads, which are spreads that do not change in any market conditions. But there are also those who use the floating spread system, where the spread changes depending on market conditions.


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      Breakeven Asset Swap Spread :
      Is the point where income from business equals capital issued, no loss or profit occurs. ]Breakeven Asset Swap Spread occurs when the basic asset used in a structured product reaches a price, where the structured product starts to make profit. For products with capital protection level of 100%, Breakeven Asset Swap Spread is the same as the price of the base asset at the time of purchase. You can immediately make profit when the price of the underlying asset moves in profitable direction. Products with different levels of capital protection will have different breakeven points.

      Breakeven Asset Swap Spread requires certain assumptions as the basis. If one of the basic assumptions undergoes a change, it will have an effect on Breakeven Asset Swap Spread so that the change will also affect the company's profit. Breakeven Asset Swap Spreads are very important for management to know the relationship between costs, volume and profits, especially information about the minimum sales amount and the magnitude of the decline in sales realization from the sales plan so that the company does not suffer losses.


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      Before we fully understand the definition of this term, we need a little more small explanation on the matter. The value of an asset swap spread can be explained as that which makes the net present value of all of the cash flows in a business field generated by the underlying asset (a bond or floater) equal to par (i.e., the upfront price of the asset swap). In order to correctly and successfully compute the breakeven asset swap spread, one must know the net present value of all cash flows and then set it equal to zero. For discounting, the LIBOR curve is often used, implying that the counterparties to the swap have the same credit quality as AA-rated banks.


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      The break-even rate is applied to bonds and refers to the difference between the yield on a nominal fixed-rate bond and the real yield on an inflation-linked bond of similar maturity and credit quality. They are similar in structure to plain vanilla swaps and the difference between the two instruments is in the underlying swap contract.
      As we all know Companies can engage in swaps in order to benefit from an exchange of comparative interest rate advantage. Asset swaps are used to fulfill a variety of goals but are generally undertaken to transform the character of an investor's asset into a more favorable means


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      Default Re: What is breakeven Asset Swap Spread and where it is used?

      Breakeven asset swap spread is valued assets that make the net present value of all cash flows generated by basic assets (bonds, floater, etc.) equal to par (i.e., the upfront price of the asset swap) To calculate the break-even asset swap swap, the net present value of all flows cash is set to zero. For discounts, the LIBOR curve is often used, implying that the partner for swap has the same credit quality as the AA-rated bank partner.

      Breakeven Swap which is indexed by inflation which has a cash flow paid at maturity. This swap is based on the exchange of the total return on the inflation index for the combined principal break-even rate. This allows investors to hedge against break-even against the inflation rate.

      This swap is also known as a zero-coupon swap, a zero-coupon inflation swap, or a break-even inflation swap.


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