A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities or foreign exchange.
 | | Term of the Day | Words to Know | | |  | | Swap | A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything. 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 and based on a benchmark interest rate, floating currency exchange rate or index price.
The most common kind of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter contracts primarily between businesses or financial institutions that are customized to the needs of both parties. | | Read More » | | Derivative | | A derivative is a securitized contract between two or more parties whose value is dependent upon or derived from one or more underlying assets. | | Read More » | | | Leg | | A leg is one component of a derivatives trading strategy in which a trader combines multiple options contracts or multiple futures contracts. | | Read More » | | | Interest Rate Swap | | An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. | | Read More » | | | Over-The-Counter | | Over-The-Counter (OTC) trades refer to securities transacted via a dealer network as opposed to on a centralized exchange such as the New York Stock Exchange (NYSE). These securities do not meet the requirements to have a listing on a standard market exchange. | | Read More » | | | | | | CONNECT WITH INVESTOPEDIA | | | | | | | |
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