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Derivatives




Swap Line


The credit which is granted to a specific firm by a financial institution for its own financing needs. The allocated credit will be translated into a swap line, typically a larger line with shorter maturity. For example, a firm might receive a credit line worth $50 million covering a period of 10 years. This credit can be translated into a swap line double the original amount and for half the original period:

Swap line = allocated credit × 2 = $50 million × 2 = $100 million

The new credit period will be shortened, for example, to 5 years. This is done because lenders may not be willing to grant credit for long periods of time.

Notwithstanding the alteration of credit terms, lenders are carefully aware of the risks associated with large exposures. Therefore, they ensure that shortening of the credit period will not be that excessive so that the resulting credit exposure is very large. For instance, a lender will not accept to alter the original tenor of 10 years into a tenor of 1 year because the credit line will end up with a huge exposure: the resulting swap line is, thus, 10 times the original credit (that is, $500 million from $50 million).



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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