What is a swap?

A swap is a financial derivative contract between two parties, where they agree to exchange cash flows or other financial instruments over a specified period of time. The most common type of swap is an interest rate swap, in which two parties exchange interest rate cash flows based on a notional principal amount. Other types of swaps include currency swaps, commodity swaps, and credit default swaps.

Swaps are used for various purposes, such as managing interest rate risk, currency risk, or commodity price risk. They can also be used to hedge against certain market events or to speculate on the future direction of the underlying asset. Swaps can be customized to fit the specific needs of the parties involved, and they are traded overthecounter (OTC) rather than on an exchange.