A Zero Basis Risk Swap (ZEBRA) is a type of financial derivative that provides a hedge against changes in the spread between two different interest rates. The name "Zero Basis Risk" refers to the fact that the swap is designed to provide protection against changes in the basis (or spread) between the two interest rates, without exposing the investor to any additional risk.A ZEBRA swap typically involves exchanging a floating-rate obligation, such as a LIBOR-based interest rate, for a fixed rate obligation. The objective of a ZEBRA swap is to provide a hedge against changes in the spread between the two interest rates, without incurring any additional basis risk. In other words, the investor is protected against changes in the spread between the two interest rates, without exposing themselves to any additional risk from fluctuations in the interest rate itself.ZEBRA swaps are often used by financial institutions and corporations to hedge against interest rate risk, particularly in cases where they have a large exposure to a floating-rate obligation. By entering into a ZEBRA swap, the investor is able to lock in the spread between the two interest rates, which can provide a more stable and predictable stream of income over the life of the swap.It's important to note that ZEBRA swaps are complex financial instruments that can involve significant risk and are not suitable for all investors. As with any investment, it's important to thoroughly understand the risks and to consult with a financial advisor before entering into a ZEBRA swap or any other financial derivative.
