A swap is a financial derivative that involves the exchange of cash flows between two parties. In a swap, two parties agree to exchange a series of future cash flows, usually based on interest rates or currencies. The most common types of swaps are interest rate swaps, currency swaps, and commodity swaps.
Interest rate swaps involve exchanging fixed-rate interest payments for floating-rate interest payments. Currency swaps involve exchanging payments in one currency for payments in another currency. Commodity swaps involve exchanging payments based on the price of a particular commodity.
Swaps are used by investors and businesses to manage risk or to take advantage of differences in interest rates or currency values between countries. They can also be used to reduce financing costs, hedge against potential losses, or to speculate on market movements. Swaps are typically traded over-the-counter (OTC), which means that they are negotiated between two parties rather than traded on a public exchange.