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Financial Terms and Glossary

Swap transaction

Swap Transaction

A swap transaction is an agreement between two parties to exchange a series of cash flows over a specified period, typically involving the exchange of fixed and floating interest rates, currencies, or other financial instruments. Swaps are used for hedging or speculative purposes and are tailored to meet the needs of the parties involved. Common types of swap transactions include interest rate swaps, currency swaps, and commodity swaps.

Example

In a swap transaction, a company agrees to pay a fixed interest rate of 4% in exchange for receiving floating payments tied to LIBOR, helping the company manage interest rate risk.

Key points

• An agreement to exchange cash flows or financial instruments over time.

• Commonly used for hedging interest rate, currency, or commodity risks.

• Includes interest rate swaps, currency swaps, and commodity swaps.

Quick Answers to Curious Questions

What are the common types of swap transactions?

Interest rate swaps, currency swaps, and commodity swaps are the most common types of swap transactions used for hedging or speculation.

How do swap transactions help companies manage financial risks?

They allow companies to hedge against fluctuations in interest rates, exchange rates, or commodity prices by locking in more predictable cash flows.

What factors determine the structure of a swap transaction?

The structure depends on the goals of the parties involved, market conditions, and the assets or rates being swapped.

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