Swap (finance)

In finance, the term "swap" has ambiguous contours but some definite and frequently encountered instantiations. A practical definition of "swap" can take the following form: "a bilateral agreement to exchange future cash flows based on some agreed formula." An example is a floating-for-fixed interest rate swap, which calls for (a) payments by one party based on the product of a floating interest rate and a fixed amount, called the notional, in exchange for (b) payments by the counterparty based on the product of a fixed interest rate (e.g., three percent) and the same notional amount. This example illustrates the origins of the name "swap" because the instrument allows the parties to swap payment obligations based on two interest rates—a floating rate and a fixed rate.

Unlike future, forward or option contracts, swaps do not usually involve the exchange of the principal during or at the end of the contract.

Swaps are primarily over-the-counter contracts involving sophisticated institutions. Retail investors do not generally engage in swaps. Swaps, like other derivatives, are often classified in one of five asset classes: (1) interest rate, (2) foreign exchange, (3) credit, (4) equity, and (5) commodity (e.g., energy, metals or other physical commodities. As of June 2025, the Bank of International Settlements reported the following estimates of swaps across the asset classes by notional outstanding and fair value (in billions USD):

Bank for International Settlements IRS, FX & Equity. Bank for International Settlements Credit & Commodity.