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(1) A contractual agreement to exchange a stream of periodic payments with a counterparty. Swaps are available in and between all active financial markets. The traditional interest rate swap agreement is an exchange of fixed interest payments for floating rate payments. A generic currency swap is an agreement to exchange one currency for another at a forward exchange rate or at a sequence of forward rates. While an equity index swap might involve the exchange of one index return for another, a more common structure is the exchange of an equity index return for a floating interest rate. 'Official' definitions of swaps and swap related terminology and standard swap provisions are provided in the International Swap and Derivatives Association publication, Definitions. See LIBOR Index Principal Swap (LIPS), LIBOR In-Arrears Swap. See also Accreting Principal Swap (APS), Commodity Swap, Asset Swap, Constant Maturity Swap, Interest Rate Swap, Rate Differential Swap (diagram). (2) The practice of exchanging one bond for another to improve yield, change credit exposure, reflect an interest rate view, or register a tax loss. This type of swap is very different from an interest rate, currency, or index swap, but the term 'swap' has been in use longer in this context. The different uses occasionally confuse new users of cash flow swaps. See also Pick-Up. (3) Futures price minus spot: basis (uncommon).
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