Swap (finance)

In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.^[1]^[2]

The general swap can also be seen as a series of forward contracts through which two parties exchange financial instruments, resulting in a common series of exchange dates and two streams of instruments, the legs of the swap. The legs can be almost anything but usually one leg involves cash flows based on a notional principal amount that both parties agree to. This principal usually does not change hands during or at the end of the swap; this is contrary to a future, a forward or an option.^[3]

In practice one leg is generally fixed while the other is variable, that is determined by an uncertain variable such as a benchmark interest rate, a foreign exchange rate, an index price, or a commodity price.^[4]

Swaps are primarily over-the-counter contracts between companies or financial institutions. Retail investors do not generally engage in swaps.^[5]

^ Financial Industry Business Ontology Version 2 Archived 2020-07-02 at the Wayback Machine, Annex D: Derivatives, EDM Council, Inc., Object Management Group, Inc., 2019
^ "What is a swap?". Investopedia. Archived from the original on 16 July 2018. Retrieved 14 October 2017.
^ Finance: A Quantitative Introduction by Piotr Staszkiewicz and Lucia Staszkiewicz; Academic Press 2014, pg. 56.
^ John C Hull, Options, Futures and Other Derivatives (6th edition), New Jersey: Prentice Hall, 2006, 149
^ "SEC Charges International Dealer That Sold Security-Based Swaps to U.S. Investors". Archived from the original on 2019-12-08. Retrieved 2019-12-08.

[FIBO2-1] Financial Industry Business Ontology Version 2 Archived 2020-07-02 at the Wayback Machine, Annex D: Derivatives, EDM Council, Inc., Object Management Group, Inc., 2019

[Investopedia-2] "What is a swap?". Investopedia. Archived from the original on 16 July 2018. Retrieved 14 October 2017.

[3] Finance: A Quantitative Introduction by Piotr Staszkiewicz and Lucia Staszkiewicz; Academic Press 2014, pg. 56.

[hull-4] John C Hull, Options, Futures and Other Derivatives (6th edition), New Jersey: Prentice Hall, 2006, 149

[5] "SEC Charges International Dealer That Sold Security-Based Swaps to U.S. Investors". Archived from the original on 2019-12-08. Retrieved 2019-12-08.

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