Asked by
Preet Singh
in
Personal Finance & Tax
at
6:34 PM on October 21, 2009
subu's Answer
A contract between two parties in which the parties: (a) promise to make payments to one another on scheduled dates in the future, and (b) use different criteria or formulas to determine their respective payments. Swaps are not guaranteed by any clearinghouse, and, therefore, are susceptible to default. Because of this, the contracting parties are sometimes required to post collateral or mark to market. Corporations and financial institutions are the primary users of swaps.
Swaps are equivalent to a series of forward contracts, each with the same price. However, the structure of a swap can be far more efficient than a package of individual contracts.
There are four classes of swaps defined by the type of their underlying instrument: interest rate, equity, currency, and commodity.
Answered at
5:39 PM on October 26, 2009
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