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Swap Definition
Friday, October 4, 3:11 PM ET

In the financial world, a "swap" is blanket term for a contract between two parties. A common type of swap that makes for a good explanatory example is an interest rate swap.

Suppose one company has borrowed money at a fixed rate of interest, but now wishes to borrow instead at a floating rate. Suppose another company has borrowed money at a floating rate but now wishes to borrow instead at a fixed rate.

These two companies can come together and agree to "swap" for an agreed upon period of time, where during that time the first company pays the second company a floating rate of interest, and the second company pays a fixed rate of interest to the first company.

The very first swap was made between IBM and the World Bank in 1981. By 2013, according to estimates by the Bank for International Settlements, the total size of the global swaps market is upwards of $600 trillion dollars.

For MarketNewsVideo.com, I'm Sayoko Murase.

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