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Unit 9: Swaps
Mahesh Kumar Sarva, Lovely Professional University

Unit 9: Swaps Notes

CONTENTS
Objectives
Introduction
9.1 Meaning and Overview of Swaps

9.1.1 Features of Swaps
9.1.2 Uses of Swaps
9.2 Interest Rate Swaps

9.2.1 Types of Interest Rate Swaps
9.2.2 Other Types of Interest Rate Swaps
9.3 Currency Swaps
9.4 Credit Risk
9.5 Mechanics of Swaps

9.6 Summary
9.7 Keywords
9.8 Review Questions

9.9 Further Readings
Objectives

After studying this unit, you will be able to:
 Explain the meaning and overview of swap
 Describe interest rate and currency swaps

 Define credit risk
 Discuss the mechanics of swaps

Introduction

A swap is a method for reducing financial risks. Swap is an exchange, and in financial jargon it
is an exchange of cash payment obligations, in which each party to the swap prefers the payment
type or pattern of the other party. In other words, swap occurs because the counter parties prefer
the terms of the other's debt contract, and the swaps enables each party to obtain a preferred
payment obligation. Generally, one party in the swap deal has a fixed rate obligation and the
other party in the same deal has a floating rate obligation, or one has an obligation denominated
in one currency and the other in another currency.

9.1 Meaning and Overview of Swaps

A swap is any agreement to a future exchange of one asset for another, one liability for another,
or more specifically, one stream of cash flows for another. A swap is a private agreement

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