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Glossary

Swap

Category — Derivatives
A swap is a derivative OTC financial instrument, an agreement that allows one asset or liability to be exchanged over time for another asset or liability. This is an agreement on the financial exchange of two parties in periodic payments in the future on pre-fixed terms.

Swap parameters:

• The denomination of the swap, from which all payments of both parties are settled.

• Frequency of payments and the period of validity of the swap agreement.

• The reference or spot market rate to which the floating payment is linked.

• The seller and the buyer of the swap.

The main types of swap agreements:

• Interest rate swap - a mandatory agreement between the parties (counterparties) on the exchange of periodic interest payments at a certain amount of the established par value, called the notional principal amount. As a rule, one of the parties (the payer of the fixed rate) agrees to pay another fixed interest rate on the specified dates during the life of the contract, while the other party (the payer of the floating rate) agrees to pay a floating rate, depending on some reference rate.Information about the IRS is available in the Indices section

• Currency swap- an agreement on the exchange of currencies on a specific date at a specific rate, and then the reverse exchange at a specified time and at a specific rate.

• Commodity (index) swap - an agreement that fixes the obligation of one party to make fixed payments based on the fixed price of the underlying asset with a specified frequency and the obligation of the other party to make floating payments based on the market price of the underlying asset.

• Credit Default Swap - a contract according to which the credit protection seller agrees to pay the buyer a certain amount (usually the face value minus the recovered debt value) in case of a specific credit event. In return, the buyer transfers the underlying obligation to the seller or pays an appropriate refund. Possible swap option with zero recoverable value; in this case, the seller of the credit protection pays the full face value of the debt if the borrower defaults. Information on the cost of CDS for some issuers is available in the Indices section

The point of entering into a swap agreement is to change one payment scheme to another. For example, a bond issuer pays coupon payments to investors at a fixed interest rate, it may choose to swap fixed payments for floating payments by entering into an interest rate swap. Also, the conclusion of a swap agreement may be interesting to companies that issue bonds in foreign currency in order to convert periodic payments into the currency of the issuing country, for such purposes a currency swap would be useful.

Thus, due to the conclusion of swap agreements, companies can get more attractive terms of borrowing on the market.
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