Abstract

Interest Swaps as a Special Case of Ricardo’s Value in Exchange Theory

This contribution discusses the analogy between interest swaps representing one of the most important forms of financial innovation and Ricardo’s comparative cost theorem. Part I introduces the problem field resulting from the indeterminate nature of the financial flows caused by interest swaps in a setting of varied levels of absolute interest costs and relative interest cost differentials. Part II illustrates the approach employed to eliminate the phenomenon of reversing relative factor intensities and to define financial flows in an unambiguous manner in any given interest cost situation. The next part explains the fact, regularly observed in interest swaps, that a company with a relatively higher credit rating invariably has its comparative advantage in the fixed interest market segment. Part IV finally reaches the conclusion that interest swaps represent a special case in Ricardo’s value in exchange theory because of the above-described conceptual conditions and empirical findings. In the last part a flow chart gives the decisions made in interest swaps in a chronological order.