Interest rate swaps are a financial mechanism used by investors to manage risk and speculate on future market performance. In a rate swap, one investor group pledges to pay a fixed interest rate on an investment to another in return for a variable interest rate on the same amount of money. This allows speculators to help other investors solidify their investments.

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Rate Increases for Investigators

Because the return on investments with floating interest rates fluctuates with the market, theyre more difficult to manage than fixed-rate investments. Money managers frequently swap floating rates for fixed rates in a rate swap in order to lock in a rate and allow for planning. If the floating interest rate rises after terms of the rate swap are negotiated, the original interest-stream owner loses out on the increased interest revenue from boosted rates, but only in the difference between the rate agreed upon with the other party in the swap and the floating one. For example, if a rate-swap is negotiated at 6.7 percent interest, and the floating rate rises to 6.9 percent, the original investor doesnt accrue interest for the 0.2 percent difference in rates.

Rate Drops for Speculators

Currency Fluctuations

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