In short
An interest rate swap is a derivative in which two parties exchange interest payments, typically fixed for variable, on a notional amount. The principal itself isn't exchanged.
Key takeaways
- Swapping fixed-rate debt to variable is usually a fair value hedge; swapping variable-rate debt to fixed is a cash flow hedge.
- The swap is recognized at fair value on the balance sheet.
- Private companies can use a simplified hedge accounting approach for certain receive-variable, pay-fixed swaps.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with variable-rate debt enters into an interest rate swap to pay fixed and receive variable, properly designated and documented as a hedge. Where are changes in the swap's fair value reported?