Swap

A swap is a financial contract in which two parties agree to exchange cash flows or other financial instruments over a specified period. Swaps are typically used to hedge against interest rate or currency risks, but they can also be used for speculative purposes. The most common types of swaps include interest rate swaps, where fixed and floating interest rate payments are exchanged, and currency swaps, where payments in different currencies are swapped.

Example

A company with a floating-rate loan enters into an interest rate swap with a bank to exchange its variable interest payments for fixed payments, protecting it from rising interest rates.