What is a swap in finance?

In finance, a swap is a derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another. Of the two cash flows, one value is fixed and one is variable and based on an index price, interest rate, or currency exchange rate.

When did interest rate swaps start?

The first interest rate swap occurred between IBM and the World Bank in 1981. However, despite their relative youth, swaps exploded in popularity. In 1987, the International Swaps and Derivatives Association reported that the swap market had a total notional value of $865.6 billion.

What are the different types of swaps?

Types of swaps include interest rate, currency/cross-currency, commodity, and credit default swaps, each serving different purposes. Swaps are used for risk hedging and accessing new markets, reducing exposure to fluctuations and enabling market expansion.

Are swaps traded on exchanges?

Unlike futures and options, swaps are not traded on exchanges but over-the-counter. In addition, counterparties in swaps are usually companies and financial organizations and not individuals, because there is always a high risk of counterparty default in swap contracts.