Disclosure under Takeovers Panel GN 20
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With swap transactions, the name says it all: swap means ‘exchange’ (also ‘swap’, as the word is both a verb and a noun in English) and essentially refers to an exchange transaction between contracting parties. However, it is an exchange transaction with at least one special feature: in a swap transaction, the parties trade opposing cash flows, i.e. a receivable or another asset for a liability.
Swaps are one of the most successful financial innovations of recent years. The swap partners trade receivables and liabilities in the same or different currencies. Expectations about future developments (such as interest rates and currencies) play a decisive role. This is because swaps involve a contractual agreement on the exchange of future cash flows. And unlike forward transactions, a swap does not involve physical fulfilment.
To understand: the participants in swap transactions basically have two different objectives. Some want to reduce risks, others take risks because they want to realise profits . In the financial sector, there are three main types of swaps: interest rate swaps (asset-and-liability swaps), currency swaps and equity swaps.
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Why are there swap transactions?
Because one side - for example, a company - can reduce the financial risks of its financing through predictable interest rates, while the other side - for example, investors with an affinity for risk - hopes to make profits through swaps.
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Swaps can also be linked to shares. Equity swaps allow investors to benefit from the performance of shares without having to buy these securities. As with interest rate or currency swaps, this involves an exchange of cash flows at a fixed agreed date. The one cash flow usually depends on a reference interest rate - such as Euribor or Libor - in relation to a predetermined nominal value. This cash flow is referred to as a ‘floating leg’. The amount of the other cash flow (‘equity leg’), on the other hand, depends on the performance of a share, a basket of shares or a share index. This swap allows fund managers, for example, to secure the value of a fixed-interest security without the commissions and other charges due on a direct investment. Unlike an interest rate swap, a loss can be incurred if the securities perform negatively. Banks and ETF providers often also enter into an equalisation obligation so that the index and ETF fund are guaranteed to have the same value."
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