Zero Basis Risk Swap

A zero basis risk swap, or ZEBRA, is a specialized type of swap for municipalities. The zero basis risk swap is an agreement between a municipality and a financial intermediary. Also known as "perfect swap" or "actual rate swap," a zero basis risk swap has the municipality pay out fixed interest and take in floating interest. The floating rate the municipality receives on zero basis risk swap equals the rate on public outstanding floating-rate debt already issued by the municipality that engages in the zero basis risk swap. Basis risk is the risk factor of uncorrelated hedging, and in a zero basis risk swap this risk is zero because the zero basis risk swap’s risk is perfectly correlated by definition. A zero basis risk swap can help cities plan annual budgets without worrying about changes in interest rates.

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