swap

In finance, a swap is a derivative in which two parties agree to exchange one stream of cash flows for another, based on some agreed formula. An example is a floating-for-fixed interest rate swap, which calls for (a) payments by one party based on the product of a floating interest rate and a fixed amount, called the notional, in exchange for (b) payments by the counterparty based on the product of a fixed interest rate (e.g., three percent) and the same notional amount. This example illustrates the origins of the name "swap" because the instrument allows the parties to swap payment obligations based on two interest rates—a floating rate and a fixed rate.

Unlike future, forward, or option contracts, swaps do not usually involve the exchange of the principal during or at the end of the contract.