What is ‘Hara-Kiri Swap’
An interest rate or cross-currency swap devoid of any profit margin for the originator. The term gets its name from Japanese banks’ and securities houses’ 1980s strategy of offerings very low rates in order to obtain business. In Japan, hara-kiri is a form of slow ritual suicide; the swaps were dubbed hara-kiri because they turned out to be a form of financial suicide for the institutions that offered them.
Explaining ‘Hara-Kiri Swap’
Although hara-kiri swaps provide no intrinsic benefits to the parties that offer them, there are a variety of extrinsic benefits to consider. For example, the practice often involves USD/JPY cross-currency swaps, which have typically been attached to new issues with the aim of obtaining a leading underwriting position.
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