A swap is an agreement made between two parties to exchange payments on regular future dates, where each payment leg is calculated on a different basis. For example, suppose that a US company has to make interest payments on a euro loan over the next five years. Unfortunately its income is in US dollars, so it is exposed to changes in the exchange rate between the euro and the dollar. The firm can enter into a currency swap with a bank, in which the bank gives it the euros it needs on the required dates to make its loan payments. In return it makes payments to the bank in US dollars. Although it is often considered as one of the most basic derivative products, a swap is actually composed of a series of forward contracts.

Categories: Derivatives

Naved

An adept programmer with experience in design, development and deployment of multiple application routines. Knowledge of various software designs paradigms, development frameworks, deployment methodologies, database modelling and process migration. Special focus on business driven design, search optimization, user interface, data access and data storage implementation. A hacker with a penchant for making technological processes more readily and comprehensively accessible.