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How can Swaps be used to reduce the risks associated with debt contracts?  

How can Swaps be used to reduce the risks associated with debt contracts?  

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Answer #1

There are two types of swaps which can reduce risks related to debt contract .

1 Interest rate swap , it provides hedging against interest rate movement. So if you are having floating rate on debt and you believe that interest rate will be going up in the future then you can hedge your position by entering into interest rate swap which fixes your interest rate.

2 Currency rate swap , so if your dent contract has currency exchnage rate interference then variation in exchange rate can impact you future liabilities so to hedge your currency risk you can use currency rate swaps.

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