Swap.

In plain English

A swap is an agreement to trade one set of cash flows for another, most often a floating interest rate for a fixed one, calculated on a notional amount that is never itself exchanged. In a plain interest rate swap, one side pays fixed and receives floating while the other does the reverse, and only the net difference changes hands on each payment date. Currency swaps exchange payments in two different currencies and may exchange principal as well. Swaps began as private bank-to-bank agreements, and much of the market later moved into central clearing and public reporting after regulators pushed for it. The notional figure describes the size of the calculation, not the money at risk.

01Why it matters

A swap lets a borrower change the shape of an interest payment without refinancing the underlying loan, which is why a company's stated debt cost and its actual cost can differ.

02The math, step by step

A company owes floating interest on 10 million and wants certainty. It enters a swap to pay 5 percent fixed and receive the floating rate on that same 10 million notional. If floating runs at 6 percent, the company receives 100,000 net (1 percent of 10 million) and its all-in cost lands near 5 percent. If floating runs at 4 percent, it pays 100,000 net and still lands near 5 percent.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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