Introduction A swap is a contractual agreement to exchange payments over time with another party. Somewhat like two firms loaning each other money. Interest rate swap - when the payments exchanged are based on different interest rates on the same currency. When the payments are in different currencies and one interest rate is fixed while the other is floating. A firm's FX and interest rate exposures change over time.
Swaps allow a position to be taken more easily than refinancing.
When borrowing funds, the firm decides on Size - amount of the loan Maturity Fixed or floating Currency of denomination. Swaps allow the firm to separate fixed and floating, and currency decisions from the actual issuance of bonds. This means that GM pays an amount to BT based on a fixed rate of interest and GM receives an amount from BT based on a floating rate of interest. Quotations Swaps are usually done through swap dealers, who are banks for the most part. Dealers quote bid and ask interest rates.