A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.
 | | 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 one leg of the swap. One cash flow is generally fixed while the other is variable, which is based on 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 » | | Delayed Rate Setting Swap | | A delayed rate setting swap is an exchange of cash flows, one of which is based on a fixed interest rate and one of which is based on a floating interest rate, in which the spread (difference) between the fixed and floating interest rates is determined when the swap is initiated but the actual interest rates are not determined until later. | | Read More » | | | Reverse Swap | | A reverse swap is 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 » | | |  | | | | CONNECT WITH INVESTOPEDIA | | | | | | | |
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