What are the different types of swaps

Swap

What is a swap?

ASwap is an exchange transaction in which receivables or liabilities in the same or a foreign currency are exchanged in order to achieve a financing, interest or yield advantage. It is a contractual agreement to exchange cash flows. For example, a fixed-interest receivable can be exchanged for a variable-interest receivable.

Individually agreed exchange deal

Swaps are among the most successful financial innovations in recent years. It is a matter of individually agreed exchange transactions between the contractual partners. In their function they are similar to futures. They mostly serve to hedge risks, but they can also be used as speculative instruments to optimize returns. In contrast to the forward transactions, which are mostly standardized and due at a certain point in time, they can be freely negotiated between the contractual partners. These as well as futures are bets on the future development of the market.

Different types

In the case of swaps, a fundamental distinction is made between interest rate and currency swaps. In the case of a pure interest rate swap, interest payment obligations are exchanged in one currency over a certain period of time. A currency swap exists if the liabilities to be exchanged are in different currencies. They can serve as a financial innovation. The two contractual partners mutually benefit from comparative cost advantages. Banks can act as intermediaries and conclude independent contracts with each partner. The banks assume the risks in an exchange transaction and receive a commission for it. In a foreign exchange swap, a spot transaction and a forward transaction are executed simultaneously on the foreign exchange market at the price of the swap rate (arbitrage). Liquidity swaps can be carried out to secure liquidity advantages.