What is a 'Swap'?

A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.

Sharper Insight. Smarter Investing. Manage Preferences TERM OF THE DAY Swap A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to. Usually, the principal does not change hands. Each cash flow comprises of one leg of the swap. One cash flow is generally fixed, while the other is variable, that is, based on a a benchmark interest rate, floating currency exchange rate, or index price. Breaking it Down: In an interest rate swap, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged) in order to hedge against... Read More Related to "Swap" An In-Depth Look at The Swap Market The swap market plays an important role in the global financial marketplace; find out what you need to know about it. Read More What is the difference between derivatives and swaps? Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative securities and swap agreements. Read More Different Types of Swaps Identify and explore the most common types of swap contracts. Read More Related Definitions Delayed Rate Setting Swap This type of interest-rate swap might be desirable if the investor expects interest rates to change in its favor in the near future but likes the spread currently available. Read More Reverse Swap An exchange of cash flow streams that undoes the effects of an existing swap. Read More Inflation Swap An inflation swap is a transaction in which two parties exchange fixed payments for floating payments tied to an inflation rate. Read More Accreting Principal Swap A derivative where counterparties exchange financial instrument benefits, involving a growing notional principal amount. Read More You are currently subscribed as: mondemand.forex@blogger.com Unsubscribe  |  Manage Subscriptions Investopedia, LLC, A Division of IAC. 114 West 41st St, floor 8, New York NY 10036 Copyright © 2018, Investopedia, LLC. All Rights Reserved Follow Us: