Rollercoaster Swap
Categories: Derivatives
First off, we just want to make it very clear that a “rollercoaster swap” is not a Chinese fire drill performed on a rollercoaster, so don’t go getting any crazy ideas out there. Safety first.
A “rollercoaster swap” is actually a payment arrangement made between two counterparties with oppositional seasonal sales that allows payments to be automatically adjusted, such that each party pays more when their sales are high and less when their sales are low. You do not need to be this tall to ride this ride.
To illustrate how this works, let’s take a hugely oversimplified example. Let’s say we own a grill store in Portland, Oregon. That’s all we sell: grills and grilling accessories. As one might imagine, our sales tend to go up in the summer and down in the winter. No one’s out there grilling up a ribeye when it’s forty degrees and sleeting outside. On the other side of town, our sister Betty owns a ski and snowboard shop. Her sales tend to go up in winter and down in summer. Now let’s say each of our companies has taken out a $100,000 loan. With a rollercoaster swap, we can enter into an agreement where we pick up some of Betty’s debt burden in the summer and she picks up an equal amount of ours in the winter. That way, we’re both able to continue to pay down our loans, but we don’t have to strap the business trying to make big payments during our off-season.
As we said, that’s a hugely oversimplified example. Seasonal swaps are usually much more complicated and can involve stuff like changing or floating interest rates, differing currencies if we’re going international, even varying intervals of time between payments. Rollercoaster swaps are highly regulated by the banks that participate in them, and there are all kinds of tax and accounting implications that go along with them. So if we are in a seasonal business and a rollercoaster swap sounds like it just might be our kind of party, we should definitely consult with our favorite tax accountant to find out if it’s a good option for us.
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Finance: What is a swap, and what is a s...41 Views
Finance allah shmoop what is a swap And what is
a swap Shin Um can we just say it's an
option to swap You know like microsoft is a micro
computer software thing or like the electrocution is electricity and
execution or the bromance is you know brother and romance
which is something totally different when dealing with gerbils Anyway
one day a guy was holding a swap turned a
corner wasn't looking where he was going then glam o
he ran into an option What came of it was
a super hybrid type of security were in a slop
like i swap you so many dollars for so many
euros is tacked onto an option You want the ability
to pay off your loan either in us dollars or
in euros assuming they still exist when your loan comes
due That whole brexit thing that issue have the option
to swap the flavor of payments you're making for the
hundred grand You borrowed no it's houses play out well
When the bond was issued one dollar bought you one
euro and the interest rate was eight percent So you
paid eight grand a year to rent that hundred for
ten years at which point you're going to pay it
all off simple but after five years the exchange rates
have drifted massively Magic fairy dust was sprinkled by wizards
all over europe They beat back the thirty two hour
work week Corruption unions and economic misery wrought by not
being able to compete with china russia in africa and
now amazingly the euro is a much stronger currency than
the u s dollar that's kind of a fictional story
here that we'll make enough In fact one euro buys
you two u s dollars like it when the euro
was first put out there So if you holding the
swap shin on the interest payment flavor of the hundred
grand you borrowed if you so choose you can pay
that eight grand in euros that is instead of the
eight thousand dollars a year in interest you can pay
for thousand euros It's almost a ziff your interest rate
was cut in half That's not really it's a value
is the same it's just the number of units were
cut have theirs You know that works And if you
live in europe and work in europe and we're paid
in euros Well it really is like a roman holiday
of interest rates of just want to focus on the
numbers But the values of the same there's No free 00:02:15.938 --> [endTime] lunch here even in swap shen lang