What is a swap?

<p id="isPasted">A swap is a financial contract between two parties who agree to exchange cash flows or financial instruments for a set period of time. The most common type of swap is an interest rate swap, in which two parties exchange interest payments based on a notional principal amount.</p><p>Swaps are used for a variety of purposes, including:</p><ul style="margin-bottom:0cm;" type="disc"><li style="margin-top:0cm;margin-right:0cm;margin-bottom: 7.5pt;margin-left:0cm;line-height:normal;font-size:15px;font-family:&quot;Calibri&quot;,sans-serif;color:#1F1F1F;background:white;">Hedging against risk: Swaps can be used to hedge against changes in interest rates, currency exchange rates, commodity prices, or stock prices.</li><li style="margin-top:0cm;margin-right:0cm;margin-bottom: 7.5pt;margin-left:0cm;line-height:normal;font-size:15px;font-family:&quot;Calibri&quot;,sans-serif;color:#1F1F1F;background:white;">Speculating on future prices: Swaps can be used to speculate on future prices of interest rates, currency exchange rates, commodity prices, or stock prices.</li><li style="margin-top:0cm;margin-right:0cm;margin-bottom: 7.5pt;margin-left:0cm;line-height:normal;font-size:15px;font-family:&quot;Calibri&quot;,sans-serif;color:#1F1F1F;background:white;">Managing cash flow: Swaps can be used to manage cash flow by exchanging fixed cash flows for variable cash flows, or vice versa.</li></ul><p>Swaps are traded over-the-counter (OTC), meaning that they are not traded on an exchange. This makes them more flexible than exchange-traded products, but it also makes them more complex and less transparent.</p><p>Swaps can be a risky investment, but they can also be a valuable tool for managing risk and generating returns. It is important to understand the risks involved before entering into any swap agreement.</p><p>Here is an example of how an interest rate swap might be used:</p><p>Suppose that Company A has a floating-rate loan and Company B has a fixed-rate loan. Company A is concerned about the possibility of interest rates rising, while Company B is concerned about the possibility of interest rates falling.</p><p>The two companies could enter into an interest rate swap in which Company A agrees to pay Company B a fixed interest rate and Company B agrees to pay Company A a floating interest rate. This would allow Company A to hedge against the risk of rising interest rates and Company B to hedge against the risk of falling interest rates.</p><p>If interest rates rise, Company A will benefit from the swap because it will be paying a lower interest rate than it would otherwise be paying. If interest rates fall, Company B will benefit from the swap because it will be receiving a higher interest rate than it would otherwise be receiving.</p>

<p>FX swaps are agreements between two foreign parties to exchange currencies. By this agreement, principal and interest payments on a loan made in one currency are swapped for principal and interest payments on a loan made in another currency of equal value. A party borrows currency from a second party as well as lending that party another currency.</p>

<p><br>A swap is an over-the-counter contract. Hence, the counterparties to a swap are exposed to counterparty risk.</p>

<p><br>Swaps are not exchange oriented and are traded over the counter, usually the dealing are oriented through banks. Swaps can be used to hedge risk of various kinds which includes interest rate risk and currency risk. Currency swaps and interest rates swaps are the two most common kinds of swaps traded in the market.</p>

<p>Swaps are agreements involving financial transactions where one of the two parties promises to make a series of payments with a set frequency in exchange for receiving another set of payments from the other party. A swap's nominal amount is used to calculate interest payments.</p>