Why are interest rate swaps a zero-sum game?
Question:Why are interest rate swaps a zero-sum game?SwapSwap is the exchange of liabilities or cash flows of different instruments of finance between two companies. The swaps could be in the form of commodity swap, currency swap, debt-equity swaps, total return swap, interest rate swap, etc. It is a financial derivative.
Answer and Explanation:The interest rate swap is the mutual agreement between two parties to exchange one stream of interest expense for another one over a while.In an interest rate swap, when one party to the swap earns, the other party loses the money, resulting in zero effect, which is referred to as a zero-sum game. There isn't any increased value to the interest rate swap, and no wealth is generated from the interest rate swap between the two transacting parties, and therefore interest rates are a zero-sum game.
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