Swap

Swaps are agreements to exchange one financial contract for another on the specified future date, as specified in the contract. Swaps are traded over the counter. Swaps can be used for hedging which includes interest rate risk and currency risk. Some of the common types of swap contracts are:

1. Interest rate swaps - It is a type of swap agreement in which two parties agree to exchange interest rate cash flows, based on a specified notional amount.

2. Commodity swaps - In a commodity swap, there is an exchange of floating price based on an underlying commodity for a fixed price over a specified period of time. No commodities are exchanged during a swap trade, instead, cash is exchanged.

3. Currency swaps - In a currency swap,  there is an exchange of the principal and the fixed interest rate on debt denominated in different currencies.

4. Credit default swaps - A credit default swap is a type of swap in which the lender of a loan is given a guarantee against the non-payment of the loan.