Swap

Swaps enable parties to exchange different types of cash flows, risks, or exposures without transferring underlying assets. Interest rate swaps exchange fixed for floating rate payments, currency swaps exchange different currencies, and credit default swaps transfer credit risk. Swaps are over-the-counter instruments tailored to specific needs but increasingly use standardized documentation. They enable efficient risk management, allowing parties to modify exposures without changing underlying positions. Swaps can extend for years with regular payment exchanges throughout the term. Regulatory changes post-2008 crisis require many swaps to be centrally cleared and traded on swap execution facilities, improving transparency and reducing systemic risk.