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 … [Read more...]
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 loan in one currency for equivalent … [Read more...]
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 seller of the swap. In … [Read more...]
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 the purchaser to fix the … [Read more...]
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 the money … [Read more...]