What are Swaps?

Posted by

To view Verified answers click on the button below.

A swap is an agreement between two parties to exchange sequences of cash flows for a
set period. Usually, at the time the contract is initiated, at least one of these series of cash
flows is determined by a random or uncertain variable, such as an interest rate, foreign
exchange rate, equity price or commodity price. Conceptually, one may view a swap as
either a portfolio of forward contracts, or as a long position in one bond coupled with a
short position in another bond. This article will discuss the two most common and most
basic types of swaps: the plain vanilla interest rate and currency swaps.