Swap

What it means

An agreement to exchange one stream of cash flows for another over time.

The exam angle

A plain vanilla interest rate swap is a series of forward rate agreements, and can also be read as being long one bond and short another.

Where it appears in the syllabus

• DerivativesCFA Level I · exam weight 6–9% · Forwards, futures, swaps, options and arbitrage-free pricing.
• Financial Markets & ProductsFRM Part I · exam weight 30% · Institutions, market structure, futures, swaps, options, rates, FX, MBS.

See it worked through

• Valuing an interest rate swap: a three-year worked exampleDiscount factors, the par swap rate and the value of a 4% swap, step by step.

There is also a short video: watch it on YouTube.

Related terms

• Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
• Contango and backwardationContango is a futures price above the spot price; backwardation is a futures price below it.
• DerivativeA contract whose value depends on the price of something else — an asset, a rate, an index or an event.
• Forward contractA private agreement to buy or sell an asset at a set price on a future date.
• Futures contractA standardised, exchange-traded forward, marked to market daily through a clearing house.
• Initial and variation marginInitial margin is the good-faith deposit required to open a futures position; variation margin is the daily cash…