Swap

[swop]

What is the definition of Swap?

A financial contract in which two parties agree to exchange streams of payments over a specified period, based on different indices such as interest rates, foreign exchange rates, or equity indices, applied to a notional amount. Swaps typically do not involve the exchange of principal.

Using Swap in an Example

In an interest rate swap, one company may agree to pay another company fixed interest rate payments in exchange for receiving variable rate payments, both calculated on a notional principal amount. This allows both companies to manage their exposure to interest rate fluctuations.

Using Swap in a sentence

The finance manager suggested entering into a currency swap to hedge against potential losses from currency fluctuations.

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