Swap

A swap is a financial contract between two parties. It involves the exchange of cash flows based on different interest rates or currencies for a specified period of time. Swaps are typically used to manage risks, take advantage of interest rate differentials or currency fluctuations, or meet financial needs.

Swap transactions are commonly conducted between banks, corporations, and investors. There are two common types of swaps:

1. Interest Rate Swap: It is an agreement between two parties with different interest rates. For example, one party may have a fixed-rate loan while the other party has a variable-rate loan. The two parties can exchange interest payments for a specified period of time. This way, both parties can benefit from interest rate differentials or balance their risks.

2. Currency Swap: It is an agreement between two parties with different currencies. The two parties can exchange their currencies for a specified period of time. Currency swaps can be used in international trade or foreign currency borrowings. This transaction can provide protection against currency fluctuations or take advantage of different interest rates.

Swap transactions are settled on a predetermined swap date. On the swap date, both parties make interest payments or currency exchanges according to the agreement.

Swaps can be used to manage risks, take advantage of interest rate differentials or currency fluctuations, or meet financial needs. However, swap transactions can be complex and may require professional financial advice. Therefore, it is important to conduct a detailed analysis and understand the risks before engaging in swap transactions.