Definition of swap

1. Foreign Exchange. The simultaneous buying and selling of a currency in approximately equal amounts for different maturity dates. The swap price is the difference in price between the two maturity dates of the swap.
2. agreement to exchange interest payments in a fixed rate obligation for interest payments in a floating rate obligation (an interest rate swap), or one currency for another (a currency swap), and reverse the exchange at a later date. A cross-currency swap is the exchange of a fixed rate obligation in one currency for a floating rate obligation in another. A swap agreement is based on a notional principal amount, or an equivalent amount of principal, that sets the value of the swap at maturity, but is never exchanged. The notional principal sets the value of the interest payments in a swap. Rules governing financial swaps are set by the International Swap Dealers Association, a self-regulatory organization.
   Interest rate and currency swaps are used by bankers and investment managers to minimize borrowing costs, to fund bank loans with liabilities of approximately equal durations, to gain liquidity (in a currency swap) in one currency versus another; to hedge portfolio risk or raise capital in foreign markets, and also to generate trading profits. Swaps most often are used for funding purposes or for creating assets, and have some advantages when compared to bank loans or deposits in Asset-Liability Management. Unlike loans or deposits, swaps are not disclosed on the balance sheet of the issuing bank, although banks must still reserve a portion of their equity capital to cover their outstanding swap agreements under risk-based capital guidelines. See also asset swap; basis swap; swap network.
3. bond swap.
4. mortgage swap.
5. commodity swap: an exchange of payments in which the value of the exchange is linked to commodity prices. Similar to an interest rate swap.

to exchange one investment for another. A swap may be executed to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio, or because investment objectives have shifted.

traditionally, an exchange of one security for another to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio, or because investment objectives have shifted. Investors with bond portfolio losses often swap for other higher-yielding bonds to be able to increase the return on their portfolio and realize tax losses. Recent years have seen explosive growth in more complex currency swaps, used to link increasingly global capital markets, and in interestrate swaps, used to reduce risk by synthetically matching the duration of assets and liabilities of financial institutions as interest rates got higher and more volatile. In a simple currency swap (swaps can be done with varying degrees of complexity), two parties sell each other a currency with a commitment to re-exchange the principal amount at the maturity of the deal. Originally done to get around the problems of exchange controls, currency swaps are widely used to tap new capital markets, in effect to borrow funds irrespective of whether the borrower requires funds within that market. The International Bank for Reconstruction and Development (World Bank) has been an active participant in currency swaps with U.S. corporations.

An interest-rate swap is an arrangement whereby two parties (called counterparties) enter into an agreement to exchange periodic interest payments. The dollar amount the counterparties pay each other is an agreed-upon periodic interest rate multiplied by some predetermined dollar principal, called the notational principal amount. No principal (no notational amount) is exchanged between parties to the transaction; only interest is exchanged. In its most common and simplest variation, one party agrees to pay the other a fixed rate of interest in exchange for a floating rate. The benefit of interest-rate swaps, which can be used to synthetically extend or shorten the duration characteristics of an asset or liability, is that direct changes in the contractual characteristics of the assets or the liabilities become matters affecting only administrative, legal, and investment banking costs.