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A contract exchanging streams of interest payments, commonly fixed-rate payments for payments linked to a changing reference rate.
Save conceptAn swap is a financial contract exchanging streams of payments related to . In a common form, one party pays a fixed rate while receiving payments linked to a floating rate that changes over time. The other party takes the opposite position. The contract specifies the reference amount used to calculate payments, the payment dates and other relevant terms.
The fixed rate agreed for a new swap can reflect market expectations for future floating rates. It also sits within a market influenced by risks, funding costs and participants’ ability to transact. An existing contract can gain or lose value as conditions change. A quoted swap rate is therefore a market price, rather than a central bank’s statement of what it will decide.
Suppose a company pays a floating rate on a loan and wants more predictable interest costs. A matching swap could require it to pay a fixed rate and receive floating-rate payments. The receipts can offset part of its variable loan payments. Whether the offset works depends on the reference rate, amount, timing and other terms matching the exposure it wants to manage.
Analysts can use swap pricing to infer expectations about policy rates, subject to their assumptions. Those estimates do not turn a possible decision into a certainty. A swap also differs from simply borrowing money: it exchanges contractual payment exposures and can create obligations to another party without being the underlying loan itself.
Malaysia’s central-bank governor keeps options open as inflation risks rise