-19-
interest rate.6 FRAs are different from swaps in that FRAs lack
periodic payments.
3. Types of Swaps in the Marketplace
Swaps in the marketplace during the relevant years consisted
primarily of interest rate swaps (sometimes, IRSWs), currency
swaps (sometimes, CYSWs), and commodity swaps (sometimes, COMs).7
An interest rate swap, the primary swap at issue, is a bilateral
agreement calling for the periodic exchange of interest payments
ascertained by applying specified interest rates to an agreed-
upon notional principal amount. A currency swap is a bilateral
agreement to exchange payments denominated in different
currencies. A commodity swap is a bilateral agreement to
exchange cashflows ascertained by applying commodity prices to a
notional quantity of a particular commodity.
B. Origin and Growth of the Swaps Market
1. Origin of the Market
The origin of the swaps market is generally traced to a
currency swap negotiated between the World Bank and IBM in 1981.
6 A forward rate is a rate that the parties to a forward
contract agree will be applied at a future date. Assume, for
example, that a person agrees to borrow money 1 year from today
and repay it with 6-percent interest at the end of the second
year. The 6-percent interest rate is a forward rate, and the
contract is a forward contract.
7 During the relevant years, FNBC was a party to each type
of these swaps. The specific swaps in dispute are FNBC’s
interest rate swaps, currency swaps, and commodity swaps.
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