More About SWAP - definition in the Cambridge English Dictionary

Rates of interest swaps [edit] A is currently paying floating, however desires to pay fixed. B is currently paying fixed but desires to pay floating. By entering into an interest rate swap, the net result is that each celebration can 'switch' their existing responsibility for their desired responsibility. Typically, the celebrations do not switch payments directly, however rather each establish a separate swap with a monetary intermediary such as a bank.

The most common type of swap is a rate of interest swap. Some companies may have comparative advantage in fixed rate markets, while other companies have a relative benefit in drifting rate markets. When Look At This Piece wish to obtain, they search for low-cost loaning, i. e. from the market where they have relative benefit.

This is where a swap is available in. A swap has the effect of changing a fixed rate loan into a drifting rate loan or vice versa. For instance, party B makes regular interest payments to celebration A based on a variable interest rate of LIBOR +70 basis points. Celebration A in return makes periodic interest payments based upon a set rate of 8.

The payments are calculated over the notional amount. The first rate is called variable since it is reset at the beginning of each interest calculation period to the then existing reference rate, such as LIBOR. In reality, the actual rate received by A and B is a little lower due to a bank taking a spread.

The principal is not exchanged. The swap efficiently limits the interest-rate danger as an outcome of having varying financing and loaning rates. Currency swaps [edit] A currency swap includes exchanging primary and set rate interest payments on a loan in one currency for principal and set rate interest payments on an equal loan in another currency.