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Swaps are customizable financial contracts where two parties agree to exchange future cash flows. While they are often tailored to specific needs, they generally fall into a few main categories:
* Interest Rate Swaps: These involve exchanging one type of interest payment for another (e.g., fixed-rate payments for floating-rate payments).
* Currency Swaps: These involve exchanging principal and/or interest payments in one currency for equivalent payments in another currency.
* Credit Default Swaps (CDS): These act like insurance, where one party pays regular premiums to another in exchange for a payout if a specific credit event (like a default) occurs on a reference asset.
* Equity Swaps: These involve exchanging returns from an equity (like a stock or equity index) for another type of return, often an interest rate.
* Commodity Swaps: These involve exchanging a floating price based on a commodity’s market price for a fixed price over a specified period.
Regardless of the category, the fundamental principle of a swap remains the exchange of one payment stream for another between the two parties involved.

Video courtesy of CSOB

Video courtesy of CSOB