Swap (swap trade, swap transaction, swap contract) is a term for off-exchange (OTC) contract between two entities for future assets exchange or cash flows at pre-agreed terms: at pre-arranged time and predetermined mean for calculating cash flows. A swap is an exchange financial trade.
There are several types of swap trade:
- Equity swap
- IRS - Interest rate swap
- Currency swap
- Commodity swap
- Credit swap
- Foreign exchange swap
Swaps in practice: Swap transactions are mainly used for the purpose of financial risk management as a barter (according to type of swap - see above). For example, a currency swap is used to ensure exchange rate risk in foreign trade. A currency swap is an agreement to buy / sell a certain currency for another with the current re-sale / purchase at an agreed future date at a pre-agreed exchange rate. Swap agreements are also often used for speculative trading. Maybe that is why they are the most widely used financial derivative. CEO has the responsibility in the organization for trading swaps.