Financial Terms related to Swap

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SWAP
Amortizing interest rate swap

• Swap in which the principal or national amount rises (falls) as interest rates rise
(decline).

Asset for asset swap

• Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Asset swap

• An interest rate swap used to alter the cash flow characteristics of an institution's
assets so as to provide a better match with its liabilities.

Basis swap

• See interest rate swap.

Call swaption
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• A swaption in which the buyer has the right to enter into a swap as a fixed-rate
payer. The writer therefore becomes the fixed-rate receiver/floating rate payer.

Circus swap

• A fixed rate currency swap against floating U.S. dollar LIBOR payments.

Coupon swap

• See interest rate swap.

Cross currency swap

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• An interest-rate swap in which the interest payments due are denominated in
different currencies.

Currency swap

• An agreement to swap a series of specified payment obligations denominated in

one currency for a series of specified payment obligations denominated in a different
currency.

Currency swaps

• By entering into a currency swap institutions can hedge their currency risk
exposure. In a fixedfixed currency swap, one financial institution sends fixed interest
rate dollar-denominated payments in exchange for say fixing interest rate sterling-
denominated payments.

Debt swap

• A set of transactions (also called a debt-equity swap) in which a firm buys a

country's dollar bank debt at a discount and swaps this debt with the central bank for
local currency that it can use to acquire local equity.

Differential swap

• Swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR.
Payments are in one currency.
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Equity swap

• A swap in which the cash flows that are exchanged are based on the total return on
some stock market index and an interest rate (either a fixed rate or a floating rate).
Related: interest rate swap.

Extension swap

• Extending maturity through a swap, e.g. selling a 2-year note and buying one with
a slightly longer current maturity.

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• Extending maturity through a swap, for example, selling a 2-year note and buying
one with a slightly longer current maturity.

Foreign exchange swap

• An agreement to exchange stipulated amounts of one currency for another

currency at one or more future dates.

Guarantor/swap program

• Freddie Mac takes a pool of mortgages from an originator and gives a PC that is
backed by the mortgages in that pool. By doing so, the originator gets the Freddie
Mac guarantee and Freddie Mac gets a fee (the difference between the cash flow
from the mortgage pool and the payments promised to the originator).

Interest rate swap

• An exchange by borrowers or asset holders of interest-rate payments at two

different rates (often one rate is fixed, the other floating). In a basis swap, both rates
are floating.

• The buyer of the swap agrees to make a number of fixed interest rate payments
periodically to the seller on some agreed upon notational amount. In return, the
seller agrees to make floating rate interest payment on the same dates to the buyer
on the same notational amount.
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• A binding agreement between counterparties to exchange periodic interest

payments on some predetermined dollar principal, which is called the notional
principal amount. For example, one party will pay fixed and receive variable.

• Is the contract whereby one party typically agrees to exchange a floating rate for a
fixed coupon rate. There are many variations to this theme. Some of these other
swaps can be cross border, fixed-for-fixed, or floating-for floating. The common
denominator to these transactions is the swapping of cashflows and not principal
amounts. There are predetermined periodic adjustments in cash flow payments.

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Intermarket spread swaps

• An exchange of one bond for another based on the manager's projection of a

realignment of spreads between sectors of the bond market.

Liability swap

• An interest rate swap used to alter the cash flow characteristics of an institution's
liabilities so as to provide a better match with its assets.

Pure yield pickup swap

• Moving to higher yield bonds.

Put swaption

• A financial tool in which the buyer has the right, or option, to enter into a swap as a
floating-rate payer. The writer of the swaption therefore becomes the floating-rate
receiver/fixed-rate payer.

Quanto swap

• See: differential swap.

Rate anticipation swaps

• An exchange of bonds in a portfolio for new bonds that will achieve the target
portfolio duration, based on the investor's assumptions about future changes in
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interest rates.

Stock swap transaction

• An acquisition method in which the acquiring firm exchanges its shares for shares
of the target company according to a predetermined ratio.

Substitution swap

• A swap in which a money manager exchanges one bond for another bond that is
similar in terms of coupon, maturity, and credit quality, but offers a higher yield.

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Swap

• (1) In securities, selling one issue and buying another.

(2) In foreign exchange, buying a currency spot and simultaneously selling it
forward.

• An arrangement whereby two companies lend to each other on different terms, e.g.
in different currencies, and/or at different interest rates, fixed or floating.

• Is a customized financial transaction between two or more counterparties.

However, banks or brokerage firms often act as intermediaries or assume some of
the risk of the total transaction as well. A swap is engineered between counterparties
who agree to make periodic payments or adjusts to one another. Swaps cover
interest rate, equity, commodity and currency products. They can be simple floating
for fixed exchanges or complex hybrid products with multiple option features. Swaps
are not exclusively OTC transactions because listed instruments are often include in
the risk management of the position. Often managers evaluate the relative merits of
conducting a swap (OTC) or a hedge predicated on listed instruments. The
interaction between these two markets promotes greater financial efficiencies.

Swap assignment

• Related: swap sale.

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Swap buy back

• The sale of an interest rate swap by one counterparty to the other, effectively
ending the swap.

Swap commodity

• The buyer of the swap agrees to make a number of payments periodically tied to
the price of a commodity such as oil and receive fixed payments. By entering into a
commodity swap, both parties attempt to hedge their exposures to the commodity
prices.

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Swap currency

• The buyer of the swap agrees to make a number of fixed or floating interest rate
payments periodically to the seller in one currency on some agreed upon notional
amount and receive payments denoted in another currency. For instance, one party
pays UD dollars and receives British pounds. By entering into a currency swap, both
parties attempt to hedge their FX exposures.

Swap equity

• The buyer of the swap agrees to make a number of payments periodically tied to
return on some equity index (such as S&P 500 index) and receive fixed payments
(such as T-Bill rate). By entering into a equity swap, both parties attempt to hedge
their exposures to stock market.

Swap interest rate

• The buyer of the Swap agrees to make a number of fixed interest rate payments
periodically to the seller or some agreed upon notional amount. In return, the seller
agrees to make floating rate interest payment on the same dates to the buyer on the
same notional amount. By entering into the swap, both parties attempt to hedge their
interest rate exposures.

Swap option
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• See: Swaption. Related: Quality option.

Swap rate

• In the foreign-exchange market, the difference between the spot and forward rates
at which a currency is traded.

• The difference between spot and forward rates expressed in points, e.g., $0.0001
per pound sterling.

Swap reversal

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• An interest rate swap designed to end a counterparty's role in another interest rate
swap, accomplished by counterbalancing the original swap in maturity, reference
rate, and notional amount.

Swap sale

• Also called a swap assignment, a transaction that ends one counterparty's role in
an interest rate swap by substituting a new counterparty whose credit is acceptable
to the other original counterparty.

Swaption

• An option on an interest-rate swap.

• Options on interest rate swaps. The buyer of a swaption has the right to enter into
an interest rateswap agreement by some specified date in the ' future. The swaption
agreement will specify whether the buyer of the swaption will be a fixed-rate receiver
or a fixed-rate payer. The writer of the swaption becomes thecounterparty to the
swap if the buyer exercises.

• Is an option on a swap. This option can be a put, call or myriad combination of

option features.

Tax swap

• Swapping two similar bonds to receive a tax benefit.

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The imm swap

• A swap of 1-year fixed against 3-month LIBOR, where the 3-month rate floats. The
start, end, and intermediate reset dates are set to coincide with the dates on four
successive IMM contracts for 3-month Eurodollars.

Toxic waste swap

• Is a transaction whereby two traders agree to exchange toxic waste or deeply

underwater securities with one another with a swap transaction. Here, the traders
can hide the losses associated with the initial losing position. Nevertheless, both

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parties continue to hold positions insecurities which are inherently overvalued for
trading or investment purposes. Upon discovery these positions will be subject to
severe mark downs in price.