Swaps: Basics

Swaps are the most heavily traded derivative contract in the world. The are used to manage exposure to certain risks, or to speculate on price or rate changes. We explain the concept of a swap, define the basic terminology of a plain vanilla interest rate swap, look at how the cash flows for each leg of a swap are calculated, and then briefly look at some different swap types such as cross-currency swaps, equity swaps, commodity swaps, and credit default swaps.