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Correlation Swap
A correlation swap is a financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index. A Correlation Swap is an instrument that allows an investor to take financial exposure…
Volatility Swap
A Volatility Swap is a forward contract whose underlying is the volatility of a given product. This is a pure volatility instrument allowing investors to speculate solely upon the movement of a stock’s volatility without the influence of its price. Thus, just like investors trying to speculate on the prices of stocks, by using this instrument investors are able to…
Variance Swap Explained
A variance swap is a financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index. A Variance Swap is a type of volatility swap where the payout is linear to variance rather than volatility. Therefore, the payout will…
Total Return Swap
A Total Return Swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset,…
Forex Swap
A Forex swap is a type of foreign exchange swap consisting of two parts, completed at the same time. One part is a foreign exchange spot trade, and the other is a foreign exchange forward transaction. Forex swaps are most often used by investors for either hedging or speculation purposes. In finance, a forex swap (or FX swap) is a…
Equity Swap
An Equity Swap is an exchange of cash flows between two parties that allows each party to diversify its income, while still holding its original assets. The two sets of nominally equal cash flows are exchanged as per the terms of the swap, which may involve an equity-based cash flow that is traded for a fixed-income cash flow. Besides diversification and tax benefits, equity swaps also…
Currency Swap
A Currency Swap is a swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet. A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a…
Credit Default Swap
A Credit Default Swap is a swap designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the…
Constant Maturity Swap
A Constant Maturity Swap is a variation of the regular interest rate swap. In a constant maturity swap, the floating interest portion is reset periodically according to a fixed maturity market rate of a product with a duration extending beyond that of the swap’s reset period. A constant maturity swap, also known as a CMS, is a swap that allows…
Basis Swap
A Basis Swap is a specific type of interest rates swap, where the interest rates exchanged are based on different money markets or currencies. A basis swap is a floating-floating interest rate swap. This might be used to customize exposures to specific points on the yield curve. More common are basis swaps between two floating indexes from different segments of…
