A swap is a contract in which two parties agree to exchange cash flows. For example, one party is currently receiving cash from one investment but would prefer another type of investment in which the cash flows are different. The party contracts a swap dealer, a firm operating in an over-the-counter market, who takes the opposite side of the transaction. By swapping the cash flow, parties can receive the cash from another investment without actual buying or selling. This helps to reduce transaction costs like brokerage commission on buying and selling.
An interest rate swap is a swap in which two parties agree to exchange a series of interest payments. Both sets of payment are made in same currency at various settlement dates based on a specific amount. This amount is known as national principal. The parties generally do not exchange principal amount since this would involve each party giving the other party the same amount of money.
A currency swap is a swap in which two parties agree to exchange a series of interest payments in difference currencies. Either or both sets of payments can be fixed or floating. A currency swap agreement requires the principal to be specified in each of the two currencies. The principal amounts are usually exchanged at the beginning and at the end of the life of the swap. Usually the principal amounts are chosen to be equivalent using the exchange rate at the swaps initiation.
An equity swap is a swap in which two parties agree to exchange a series of payments based on a specific national principal. In equity, at least one of the two streams of cash flows is determined by a stock price, the value of stock portfolio, or the level of stock index. The other stream of cash flows can be a fixed rate, a floating rate such a LIBOR, or it can also be determined by the value of another stock, stock portfolio or stock index.
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An interest rate swap is a swap in which two parties agree to exchange a series of interest payments. Both sets of payment are made in same currency at various settlement dates based on a specific amount. This amount is known as national principal. The parties generally do not exchange principal amount since this would involve each party giving the other party the same amount of money.
A currency swap is a swap in which two parties agree to exchange a series of interest payments in difference currencies. Either or both sets of payments can be fixed or floating. A currency swap agreement requires the principal to be specified in each of the two currencies. The principal amounts are usually exchanged at the beginning and at the end of the life of the swap. Usually the principal amounts are chosen to be equivalent using the exchange rate at the swaps initiation.
An equity swap is a swap in which two parties agree to exchange a series of payments based on a specific national principal. In equity, at least one of the two streams of cash flows is determined by a stock price, the value of stock portfolio, or the level of stock index. The other stream of cash flows can be a fixed rate, a floating rate such a LIBOR, or it can also be determined by the value of another stock, stock portfolio or stock index.
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