Swaps
A swap is a financial instrument that involves exchanging one set of cash flows for another. It is a derivative contract through which two parties exchange financial instruments, such as interest rates, currencies, or commodities. Swaps are used to hedge risk, speculate, or for arbitrage purposes. They are also used to manage exposure to certain types of risk, such as interest rate risk, currency risk, and commodity risk.
History of Swaps
The concept of swaps dates back to the early 1970s when the International Swap Dealers Association (ISDA) was formed. The ISDA was created to standardize the terms and conditions of swap contracts. Since then, the use of swaps has grown significantly and they are now used by a wide range of investors, including banks, hedge funds, and corporations. Swaps are also used by governments and central banks to manage their exposure to certain types of risk.
Comparison of Swaps
| Type of Swap | Description |
|---|---|
| Interest Rate Swap | An agreement between two parties to exchange a fixed interest rate for a floating interest rate. |
| Currency Swap | An agreement between two parties to exchange one currency for another. |
| Commodity Swap | An agreement between two parties to exchange one commodity for another. |
Summary
Swaps are financial instruments that involve exchanging one set of cash flows for another. They are used to hedge risk, speculate, or for arbitrage purposes. They are also used to manage exposure to certain types of risk, such as interest rate risk, currency risk, and commodity risk. For more information about swaps, please visit the websites of the International Swap Dealers Association (ISDA) or the Commodity Futures Trading Commission (CFTC).
See Also
- Options
- Futures
- Forwards
- Derivatives
- Hedging
- Speculation
- Arbitrage
- Interest Rate Risk
- Currency Risk
- Commodity Risk
