What are swaps & how do they work?

Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific period of time. Swaps offer great flexibility in designing and structuring contracts based on mutual agreement. This flexibility generates many swap variations, with each serving a specific purpose.

What are the different types of currency swaps?

Variations also exist in currency swaps, including fixed vs. floating and floating vs. floating. In sum, parties are able to hedge against volatility in forex rates, secure improved lending rates, and receive foreign capital. Commodity swaps are common among individuals or companies that use raw materials to produce goods or finished products.

What is a swap spread in LIBOR?

As forward expectations for LIBOR change, so will the fixed rate that investors demand to enter into new swaps. Swaps are typically quoted in this fixed rate, or alternatively in the “swap spread,” which is the difference between the swap rate and the equivalent local government bond yield for the same maturity.