Glossary

A swap is a financial derivative contract between two parties where they agree to exchange a series of cash flows over a specified period. 🔄

Swaps are typically used to hedge risks, such as interest rate or currency risk, or to speculate on market movements. The most common types of swaps are interest rate swaps and currency swaps.

Example: Company A has a £1 million loan with a fixed interest rate, while Company B has a £1 million loan with a variable interest rate. To manage their respective interest rate risks, they enter into an interest rate swap, where Company A pays Company B the variable rate and receives the fixed rate in return.

Fun fact: The first interest rate swap was executed between IBM and the World Bank in 1981. 💡 Since then, swaps have become a vital part of the global financial system, with a notional value in the trillions of dollars.