In todays video we learn about how Swap participants benefit from the law of comparative advantage.
These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
Check out our website http://www.onfinance.org/
Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle
Swaps and Comparative Advantage
In economics, the law of absolute advantage stated that countries should specialize in what they are best or most efficient at producing, and then exchange these goods with other countries, making both countries better off.
David Ricardo’s vital contribution to economic thought was the law of comparative advantage, an economic theory stating that even if one country is more efficient in the production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies. This law helps explain why countries engage in international trade even when one country’s workers are more efficient at producing every single good than workers in other countries.
It is easy to understand how if one company is able to get a better deal in fixed-rate borrowing, but prefers to borrow at a floating rate, while another company is in the equal and opposite situation, it might make sense for these two companies to enter into a swap. In the situation where one firm has better access to the capital markets than all others, it might still make sense for them to enter the swaps market.
#comparative advantage swaps calculation
