What is a swap?
A swap is a financial contract between two parties to exchange future cash flows.
What are the common types of swaps?
The most common types of swaps are interest rate swaps, currency swaps, and commodity swaps.
How does an interest rate swap work?
An interest rate swap involves exchanging fixed-rate cash flows for floating-rate cash flows, or vice versa.
What is a currency swap?
A currency swap is a contract to exchange one currency for another at a predetermined rate.
What is a commodity swap?
A commodity swap involves exchanging the cash flows of a commodity, such as oil or gold, for a fixed or floating price.
What is the purpose of a swap?
Swaps are used to manage risk, hedge against market fluctuations, and mitigate the effects of interest rate or currency volatility.
How is a swap different from a futures contract?
A swap is a customizable contract between two parties, while a futures contract is a standardized agreement traded on an exchange.
What is a notional amount in a swap?
The notional amount is the hypothetical amount of principal that the cash flows are based on in a swap contract.
What is a counterparty in a swap?
A counterparty is the other party involved in a swap contract.
What is a dealer in a swap?
A dealer, also known as a market maker, is a financial institution or individual that facilitates the swap transaction between the two parties.
What are the risks associated with swaps?
The risks associated with swaps include credit risk, market risk, liquidity risk, and operational risk.
Can a swap be cancelled or terminated?
Yes, a swap can be cancelled or terminated before the agreed-upon maturity date, often with a termination fee.
What is a swap spread?
A swap spread is the difference between the fixed rate and the floating rate in an interest rate swap, used as an indicator of credit risk and market sentiment.
What does it mean when a swap is "out of the money" or "in the money"?
A swap is "out of the money" if the present value of the cash flows for one party is less than the other, and "in the money" if the present value is greater.
What causes a swap to become "out of the money"?
A swap can become "out of the money" if there are changes in market conditions, such as interest rates or exchange rates, that favor one party over the other.
What is a swap curve?
A swap curve is a graph showing the relationship between the term to maturity and the interest rates of varying types of swaps.
What is a reset frequency in a swap?
A reset frequency is the time period between interest rate adjustments in a swap, typically monthly, quarterly, or semi-annually.
How does a swap affect a company's financial statements?
A swap can impact a company's financial statements by changing the amount and timing of cash flows and potentially affecting earnings and debt levels.
What is negative basis in a swap?
Negative basis, also known as negative carry, is when the fixed rate in a swap is lower than the equivalent maturity government bond yield.
What happens if one party to a swap defaults?
If one party to a swap defaults, the other party may be forced to take on their position or sell the contract to another party.
What is a credit support annex (CSA)?
A credit support annex is a legal document that outlines the collateral requirements for a swap agreement.
How can I calculate the value of a swap?
The value of a swap can be calculated using mathematical formulas that take into account various factors such as interest rates and cash flows.
What can cause errors in a swap transaction?
Errors in a swap transaction can be caused by incorrect data, system malfunctions, human error, or mismatched terms between the two parties.
What is a trade confirmation for a swap?
A trade confirmation is a document sent by a swap dealer to both parties of the swap, confirming the terms of the transaction.
What should I do if I encounter an error message during a swap transaction?
If you encounter an error message during a swap transaction, try to identify the cause and consult with your swap dealer or financial advisor.
