Definition of Swap

Swap

An arrangement whereby two companies lend to each other on different terms, e.g. in different
currencies, and/or at different interest rates, fixed or floating.

Swap

An exchange of cash flows between two counterparties. The
counterparties may exchange flows in different currencies
(currency swap) or exchange floating interest rate payments for
fixed rate payments (interest rate swap).

Swap

A contract between two parties to exchange cash flows in the future
according to some formula.

swap

Arrangement by two counterparties to exchange one stream of cash flows for another.

Amortizing interest rate swap

swap in which the principal or national amount rises (falls) as interest rates
rise (decline).

Asset for asset swap

Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.

Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.

Circus swap

A fixed rate currency swap against floating U.S. dollar LIBOR payments.

Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.

Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.

Differential swap

swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. Payments are
in one currency.

Equity swap

A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

Extension swap

Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly
longer current maturity.

Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.

Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.

Liability swap

An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so
as to provide a better match with its assets.

Pure yield pickup swap

Moving to higher yield bonds.

Put swaption

A financial tool in which the buyer has the right, or option, to enter into a swap as a floatingrate
payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

Quanto swap

See: differential swap.

Rate anticipation swaps

An exchange of bonds in a portfolio for new bonds that will achieve the target
portfolio duration, based on the investor's assumptions about future changes in interest rates.

Substitution swap

A swap in which a money manager exchanges one bond for another bond that is similar in
terms of coupon, maturity, and credit quality, but offers a higher yield.

Swap assignment

Related: swap sale.

Swap buy-back

The sale of an interest rate swap by one counterparty to the other, effectively ending the swap.

Swap optio

See: swaption.
Related: Quality option.

Swap rate

The difference between spot and forward rates expressed in points, e.g., $0.0001 per pound sterling.

Swap reversal

An interest rate swap designed to end a counterparty's role in another interest rate swap,
accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount.

Swap sale

Also called a swap assignment, a transaction that ends one counterparty's role in an interest rate
swap by substituting a new counterparty whose credit is acceptable to the other original counterparty.

Swaption

Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate
swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer
of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the
counterparty to the swap if the buyer exercises.

Tax swap

swapping two similar bonds to receive a tax benefit.

Swaption

A swap option; an option on an interest-rate swap. The option gives
the holder the right to enter into a contracted interest-rate swap at a specified
future date. See swap.

Back-up

1) When bond yields and prices fall, the market is said to back-up.
2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.

Counterparties

The parties to an interest rate swap.

Effective date

In an interest rate swap, the date the swap begins accruing interest.

Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.

Floating-rate payer

In an interest rate swap, the counterparty who pays a rate based on a reference rate,
usually in exchange for a fixed-rate payment

Give up

The loss in yield that occurs when a block of bonds is swapped for another block of lower-coupon
bonds. Can also be referred to as "after-tax give up" when the implications of the profit or loss on taxes are
considered.

ISDA

International swap Dealers Association. Formed in 1985 to promote uniform practices in the writing,
trading, and settlement of swaps and other derivatives.

Maturity

For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the
date that the swap stops accruing interest.

Notional principal amount

In an interest rate swap, the predetermined dollar principal on which the
exchanged interest payments are based.

Pay-up

The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.

Pickup

The gain in yield that occurs when a block of bonds is swapped for another block of higher-coupon bonds.

Plain vanilla

A term that refers to a relatively simple derivative financial instrument, usually a swap or other
derivative that is issued with standard features.

Quality option

Also called the swap option, the seller's choice of deliverables in Treasury Bond and Treasury
note futures contract. Related: cheapest to deliver issue

Reference rate

A benchmark 'interest rate (such as LIBOR), used to specify conditions of an interest rate
swap or an interest rate agreement.

Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.

Trade date

In an interest rate swap, the date that the counterparties commit to the swap. Also, the date on
which a trade occurs. Trades generally settle (are paid for) 1-5 business days after a trade date. With stocks,
settlement is generally 3 business days after the trade.

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