Chapter 7 Swaps

The birth of the over-the-counter swap market can be traced to a currency swap negotiated between IBM and the World Bank in 1981. The World Bank had borrowings denominated in US dollars while IBM had borrowings denominated in German deutsche marks and Swiss francs. The World Bank (which was restricted in the deutsche mark and Swiss franc borrowing it could do directly) agreed to make interest payments on IBM’s borrowings while IBM in return agreed to make interest payments on the World Bank’s borrowings.

Since that first transaction in 1981, the swap market has seen phenomenal growth. Swaps now occupy a position of central importance in over-the-counter derivatives market. The statistics produced by the Bank for International ...

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