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Margin Swap

A swap in which there is a margin above or below LIBOR (a upward or backward margin) on the floating leg, as opposed to a flat floating leg. For example, the floating leg of an interest rate swap may pay LIBOR plus 50 basis points. The swap’;s fixed rate quote is adjusted to account for this margin. Assume a bank finances its borrowing at LIBOR plus 40 basis points, therefore it may enter into a margin swap in which it receives LIBOR plus 40 at least in order to cover its cash outflows going to service the loans. The fixed-leg of the swap needs to be adjusted to reflect the margin on the other leg. Accordingly, if the fixed rate was normally at 6.4%, then it would be altered, say, to 6.6%.


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