What is Swap? Things to Know About Swap...

What is Swap? In financial markets, contracts in which interest payments and foreign currency denominations of two parties are exchanged are called Swaps.

Swap is defined literally as "to exchange, swap, swap, change".

What does Swap do?

A swap is a transaction in which two parties exchange the cash flow associated with an asset or liability between them. Swap transactions aim to minimize the risk arising from changes in interest rates and exchange rates.

What is a swap transaction good for?

• Providing access to different markets
• Can be used to reduce resource utilization costs
• Ensure protection of trade secrets
• Contracts can be made at the desired maturity
• Protection from market instability
• Reduction or elimination of risks
• What is an interest rate swap?

An interest rate swap is a contract that provides for the exchange of interest payments calculated according to different interest rate principles on a benchmark principal amount at maturities agreed between the two parties. In this contract, the structure of interest payments on debts denominated in the same currency changes, but the principal is not exchanged. There are three different types of swap transactions in the financial market:

• Currency swaps,
• Interest rate swap,
• Cross currency swap transactions.

In currency swaps, an amount of money is exchanged, the terms of which are agreed upon and the rate determined by the parties to the swap transaction. At the end of the contract, the principal amounts exchanged are returned to the parties. It is widely preferred. In an interest rate swap, interest rates are exchanged between the parties. The contract has a benchmark principal. A certain interest rate on this unchanging principal is exchanged within a maturity determined by the parties. In a cross currency swap, different currencies or different interest rates are exchanged by the parties. This exchange involves principal and interest rates. These liabilities can be fixed or floating. The parties are obliged to make payments in the amount exchanged as a result of the cross currency swap.