Asset Swap
Author: Calvin Neudorf
Category: Finance
Republish this article manually
Republish articles from Finance category automatically
In its most rudimentary form, an asset swap is an exchange of the cash flow or risk profile of one asset for another, over a given period of time. Assets swaps are undertaken for a variety of reasons but, fundamentally, they are driven by an investor's need to improve or rationalize the character of an underlying asset (shares or bonds) in specific market conditions.
Briefly, the opportunities afforded by asset swaps are limited only by the numerous, virtually unlimited, options available in the marketplace.
Why asset swaps today?
The sub-prime crisis demands that virtually every investment portfolio be scrutinized from the twin prisms of repricing and reallocation; repricing because the risks embedded in any investment instrument have multiplied in recent weeks, reallocation because the quality of an overwhelming portion of the currently outstanding equity and debt is now being questioned.
The transition in asset valuations (and valuation techniques) could well continue through the next 12-18 months. Strategy Inc Research recommends that you take measures to protect and, quite possibly, enhance your investment portfolio today; be aware that the transition is likely to result in serious damage to assets which remain dormant, without the benefit of studied reconsideration.
Furthermore, traditional hedges like futures, forwards and options are no longer workable; either the costs are prohibitive, or hedge contracts are simply not on offer pursuant to the dramatic market shifts in recent weeks. An asset swap, as a consequence, is the only instrument which fills the void; asset swap structures are undeniably based on shares, bonds or convertibles; but they go beyond the scope of traditional investment vehicles by providing an extremely high degree of flexibility with respect to investment strategy, short or long term.
Significant Pointers:
From the perspective of the junior markets, the most challenging asset swaps are being influenced by the need to swap equity into debt, primarily due to the fear of renewed (and unprecedented) potential downside in hundreds of share listings; asset swap specialists report a seemingly unending stream of inquiries seeking to cover downside risk. The other subject of immediate relevance is the interplay between resource-based operations on one hand and debt or hybrid prices on the other. Given the founding premises of the collapse in the sub-prime market, dormant real estate has become another focus of asset swap traders.
Strategy Inc Research wishes to alert investors that the asset swap is a structured product. While there are standard currency and interest rate swaps which are widely used in the asset swap segment of the capital markets, incorporating risk transfers (e.g. equity to bonds, debt-quality exchanges and commodity-linked mechanisms) into an asset swap requires a degree of innovation and engineering; in such instances, pricing parameters are subject to change on an ongoing (day-to-day) basis.
Finally, Strategy Inc Research must point out that the exponential rise in precious metals and energy prices has created a powerful window of opportunity in the asset swap arena. To take one particular example, there is a growing demand, from the retail and institutional sector, to swap out of equity or debt into gold and oil futures. Those involved in gold mining or oil production need to exploit this window now.
Caution: This Insight Bulletin is for the exclusive use of sophisticated traders. Strategy Inc Research is not responsible for any irresponsible use of its contents. The trading and investment propositions described herein are the result of research conducted by Strategy Inc Research or its affiliates; the propositions are time-sensitive in nature. For more information and clarifications, please contact Strategy Inc Research at CalvinNeudorf@gmail.com
Resource Box:
Keywords: Asset, Swap, Calvin Neudorf, banking, borrowing, offshore
View Count: 100
Date Submitted: 5/10/2008
Most recent articles in
Finance category:
Other related articles in
Finance category: