Interest Rate Swap
An interest rate swap is a financial derivative contract between two parties that agree to exchange one stream of future interest payments for another. The two parties involved in an interest rate swap are typically a borrower and a lender. The borrower pays a fixed rate of interest to the lender, while the lender pays a variable rate of interest to the borrower. The two parties agree to exchange these payments over a specified period of time. The interest rate swap is used to hedge against interest rate risk, as well as to speculate on future interest rate movements.
History of Interest Rate Swaps
Interest rate swaps have been around since the early 1980s. They were first developed by Salomon Brothers, an investment bank, as a way to hedge against interest rate risk. Since then, interest rate swaps have become a popular tool for hedging and speculation in the financial markets. Interest rate swaps are now used by banks, corporations, governments, and other financial institutions to manage their exposure to interest rate risk.
Comparison of Interest Rate Swaps
| Type of Swap | Fixed Rate | Variable Rate |
|---|---|---|
| Fixed-for-Fixed | Fixed | Fixed |
| Fixed-for-Floating | Fixed | Floating |
| Floating-for-Floating | Floating | Floating |
Summary
Interest rate swaps are a financial derivative contract between two parties that agree to exchange one stream of future interest payments for another. They are used to hedge against interest rate risk, as well as to speculate on future interest rate movements. For more information on interest rate swaps, please visit Investopedia, The Balance, or Bloomberg.
See Also
- Currency Swap
- Credit Default Swap
- Total Return Swap
- Equity Swap
- Basis Swap
- Commodity Swap
- Inflation Swap
- Cross Currency Swap
- Volatility Swap
- Option Swap
