In finance, a swap is a contract between two parties to exchange streams of cash flows or financial instruments over time. The most common example is an interest rate swap, where one party pays a fixed rate while receiving a floating rate.

Swaps allow firms to manage exposure without altering the underlying asset. A company with variable-rate debt might lock in predictable payments by swapping to a fixed rate. Currency swaps help manage exchange-rate risk across borders.

These contracts are typically customized and traded over the counter rather than on exchanges. Counterparty risk matters: each side relies on the other to honor the agreement over its life.

Common types

• Interest rate swaps
• Currency swaps
• Commodity swaps
• Credit default swaps