Swap

An exchange of streams of payments between two parties for their mutual benefit. Swaps can involve an exchange of debt obligations, interest payments, or currencies with a commitment to re-exchange them at a specified time. The parties swap them because the terms available to them are not as good as those available to the other. They take the form of an exchange of [[Cash Flow|cash flow]]s between the parties so that [[Interest Rate|interest rate]] [[Risk|risk]] or [[Currency Risk|currency risk]] can be offset and a better match made between [[Assets|assets]] and [[Liabilities|liabilities]]. For example, a company may have costs it must pay in Swiss francs while its revenues are in U.S. dollars. Another company may have the opposite requirement. A bank, for a fee, arranges a [[Currency Swap|currency swap]], which meets both requirements. The same arrangement can be made with [[Interest Rate|interest rate]]s where two parties exchange fixed rate for floating rate risk to their mutual advantage. The two parties do not exchange the underlying [[Debt|debt]], just cash flow or interest payments. Equity and commodity swaps are also widely traded. Most swaps are traded over the counter ([[OTC]]) but they can also be traded on [[Futures|futures]] markets.