Swap

Definition

Swap. A derivative instrument that facilitates the exchange of financial instruments among the parties; the instruments can be almost anything, but most swaps involve cash flows (streams of payments or other commitments over time) based on a notional principal amount that both parties agree to

Usually, the principal does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable, that is, based on a a benchmark interest rate, floating currency exchange rate or index price.

Issues and Challenges

The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party. Helpful to split these according to the assets that are swapped. So for instance there are equity swaps, commodity swaps where you swap different assets. These are not mutually exclusive to labels about Fund Leg, and so on, that are different ways that people trading in those assets distinguish between those legs. For example in IR, we talk Fixed, Floating. capital Index Swap, where the return on oen leg is indexed to an inflation index but it's still an IR swap where the payment relates to an inflation index. So keeping the 2 legs in some sort of notion balance - example index annuity swap, capital index swap and so on.

These terms refer to the behavior of the underlying swap rather than an arbitrary classification of what leg is what. Different structures of swap is less relevant. The swap contract does not necessarily have 2 legs, but it usually would. The structure is in the transactions, i.e., the commitments embodied in the terms for the two sides of those transactions, the legs which are simply the embodiment of those commitments, and so on. Then the details structure is in the leg definitions. Note also that different kinds of leg can have various structures regardless of how or why they are used in a contract.

See Also

• http://www.investopedia.com/terms/s/swap.asp

Disclaimer

This entry annotates a FIBO Ontology Class. FIBO is a trademark and the FIBO Ontology is copyright of the EDM Council, released under the MIT Open Source License. There is no guarantee that the content of this page will remain aligned with, or correctly interprets, the concepts covered by the FIBO ontology.