What is a Hara-Kiri swap
Harakiri the interest-rate swap or cross-currency swap devoid of potential profit for the initiator. The term became popular in the 1980s, when Japanese banks and brokers had offers very attractive rates in order to get business from mostly foreign companies. In Japan harakiri is a form of slow ritual suicide. The swap was called Hara-Kiri, because it is not making a profit on these types of transactions were to be considered as financial suicide.
Breaking down ‘ – Kiri swap
Hara-Kiri swaps provide no domestic benefits for the parties that offer them, but there are external benefits. Offering attractive swap in a large company can make their business with your Bank. This could open up opportunities for profit in other countries, including underwriting new issues, loans, Bank fees, insurance, and the list goes on. Danger to the host of the party is that experienced investors will use harakiri to change without providing a profitable business elsewhere.
As Hara-Kiri Swaps Work
Swaps-Kiri work, and other currency or interest rate swaps. The difference is that with harakiri swap rates offered by the Creator is more attractive than what’s available on the market. For example, a Sender swap can offer higher interest payments to the other party, than what other banks offer, or they can offer more attractive exchange rates. Such actions reduce the profit of the Bank, making it less likely that they profit directly from the transaction.
Such swaps are traded on the OTC market (otc), and often directly by the manufacturer or the permission of the owner of a Bank or brokerage to potential clients. With an OTC transaction, the parties can negotiate the terms they want from the swap. Thus, the Sender can set the maximum and minimum rates, they will pay/receive are, in fact, guarantees the other side will even (at worst) or forward (at best) on the swap. With currency fluctuations and interest rates, as well as potentially huge amounts of money involved in such, as a rule, an institutional trade if the market goes in the wrong direction, it can mean big losses or anticipated profit potential for the Bank or broker.
Hara-Kiri swaps the most popular in Japanese yen related to swaps. Their popularity has declined as Japanese banks have expanded into Europe, and therefore no longer need to try to entice foreign companies to do business in Japan. In addition, the Japanese stock market started crashing in the early 90-ies, putting stress on banks and the economy.