Swaps are important in today's world and represent a $14 trillion market. They can be used to accomplish a variety of purposes from managing cash flows in a multinational environment to managing costs for material purchases. The subtitle to this book indicates that it is intended to be a comprehensive guide to swaps, which it is, but in an interesting format. It is small, a book that can be carried in a coat pocket. I actually tried it and it can! Each chapter begins with large fonts that lead you to believe you can read the chapter in no time, but then it switches to more normal type size, slowing you down to a more normal pace. However, the book is not designed necessarily to be read in order and can be read in bits and pieces. At any rate, it is well organized and can be completed in a comparatively short period of time.

It contains four chapters and a number of appendices. Chapter one covers the what, why, when, and who of swaps. Its purpose is to provide background information on swaps, which it does through examples and illustrations. The when portion of the chapter covers swap history. It is a comparatively new technique, going back only to the 1970s when institutions had to come up with a way to get around the British government's tax on the exchange of pound sterling.

Chapter two covers how, when, and whether to use swaps. Swaps are divided into three types: arbitrage, hedging, and speculative. The author clearly favors using swaps for hedging over the other two purposes. Using swaps for arbitraging is an attempt to squeeze out some type of advantage, but the benefits can be illusionary. There are other alternatives such as forwards, options, etc. that may be preferable. Using them for speculative purposes can turn out real good or real ugly.

Chapter three explains how you actually do a swap. It goes through the life cycle, from conception (corporate strategy in case you are wondering), birth, maintenance, and the end. Each cycle includes small sections containing some expert's view on the subject being
discussed.

The last chapter covers topics connected with swaps presented in alphabetical order. It starts off with a section on accounting that is right up to date. The subject matters vary and they can be quite esoteric such as swaptions (an option on the fixed leg of an interest rate swap).

The appendices appear quite useful. They include a glossary of terms, a listing of journals and associations involved with swaps, market makers for various types of swaps, and a bibliography.

Overall, it is a well written and organized book that should be helpful to anyone interested in swaps. It might even be more helpful to managers to explore how this technique can help them manage their costs. *

SWAP LITERACY

By Elizabeth Ungar, PhD

Bloomberg Press, 158 pages, $40