Over the past five years, one of the most rapidly growing and innovative areas in the international capital market has been the swap market-comprising interest rate swaps, currency swaps and, more recently, asset swaps. The market is estimated to have grown from about $5 billion in 1982 to some $400 billion at end-1986.
Swaps provide a mechanism for exploiting market imperfections and are also a valuable technique for managing financial flows-on both the liability and the asset side. As such they are widely used by all kinds of institution in the financial, corporate and government sectors.
This article has several aims: to explain the mechanics of different types of swap and the basic principles underlying the transactions; to consider the origins and evolution of the market; to present empirical data on the size and nature of the swap market; and to discuss the prospects for the market.
Recent developments in the swap market