ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is a Swap? A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything.

Detailed explanation-2: -Swaps are customized contracts traded in the over-the-counter (OTC) market privately, versus options and futures traded on a public exchange. The plain vanilla interest rate and currency swaps are the two most common and basic types of swaps.

Detailed explanation-3: -The word exchange implies that you are going to receive an equal item in return. If you take an item to the store that is defective you will exchange it for a good but equal item. If you swap something, they are generally two different items. You may swap a baseball for a football.

Detailed explanation-4: -A swap is an agreement for a financial exchange in which one of the two parties promises to make, with an established frequency, a series of payments, in exchange for receiving another set of payments from the other party.

Detailed explanation-5: -#1 Interest rate swap. Counterparties agree to exchange one stream of future interest payments for another, based on a predetermined notional principal amount. #2 Currency swap. #3 Commodity swap. #4 Credit default swap. 05-Dec-2022