Presented by

Kruthika.C.G
 Meaning
A swap is an agreement between two parties exchange
two streams of cash flows over a defined period of time,
usually through an intermediary like a financial
institution.
 A swap is a contract between two parties in which the
first party promises to make a payment to the second
and the second party promises to make a payment to
the first. Both payments take place on specified dates.
A SWAP is a derivative in which
counterparties exchange certain benefits of one
party's financial instrument for those of the other party's
financial instrument.
Features
Basicallya forward
Double coincidence of wants
Necessity of an intermediary
Settlement
Long term agreement
Types Of Swaps
1. Plane Vanilla Interest rate swaps
2. Currency Swaps
3. Commodity swaps
4. Equity swaps
Plain Vanilla Interest Rate Swap
It is the exchange of a fixed rate loan to a
floating rate loan. The life of the swap can
range from 2 years to over 15 years. The
reason for this exchange is to take benefit
from comparative advantage.
A is currently paying floating, but wants to pay fixed. B is currently paying fixed
but wants to pay floating. By entering into an interest rate swap, the net result
is that each party can 'swap' their existing obligation for their desired
obligation. Normally the parties do not swap payments directly, but rather, each
sets up a separate swap with a financial intermediary such as a bank. In return
for matching the two parties together, the bank takes a spread from the swap
payments.
Example
Consider a bank, which pays a floating rate of
interest on deposits (i.e., liabilities) and earns
a fixed rate of interest on loans (i.e., assets).
This mismatch between assets and liabilities
can cause tremendous difficulties. The bank
could use a fixed-pay swap (pay a fixed rate
and receive a floating rate) to convert its
fixed-rate assets into floating-rate assets,
which would match up well with its floating-
rate liabilities. 
Currency Swaps
A currency swap is a contractual
agreement between counterparties in
which one party makes payments in one
currency and the other party makes
payment in a different currency for a
stated period of time.
Example
Consider a well-known U.S. firm that
wants to expand its operations into
Europe, where it is less well known. It
will likely receive more favorable
financing terms in the US. By then using a
currency swap, the firm ends with the
Euros it needs to fund its expansion. 
 Currency swaps help eliminate the differences
between international capital markets. Interest rates
swaps help eliminate barriers caused by regulatory
structures.
 While currency swaps result in exchange of one
currency with another, interest rate swaps help
exchange a fixed rate of interest with a variable rate.
 The needs of the parties in a swap transaction are
diametrically different.
 Swaps are not traded or listed on exchange but they
do have an informal market and are traded among
dealers.
Commodity Swap
A commodity swap is a contractual agreement
between counterparties, the cash flows to be
exchanged are linked to commodity prices.
Commodities are physical assets such as metals,
energy stores and food including cattle. E.g. in a
commodity swap, a party may agree to exchange cash
flows linked to prices of oil for a fixed cash flow
A producer of a commodity may want to reduce the
variability of his revenues by being a receiver of a
fixed rate in exchange for a rate linked to the
commodity prices.
 Example
A company that uses a lot of oil might use a
commodity swap to secure a maximum price
for oil. In return, the company receives
payments based on the market price (usually
an oil price index).
If a producer of oil wishes to fix its income,
it would agree to pay the market price to a
financial institution in return for receiving
fixed payments for the commodity.
Equity Swaps
An equity swap or an equity index swap is a
contractual agreement between
counterparties, wherein at least one party
agrees to pay the other a rate of return based
on a stock index during the life of the swap.
The other party makes payments based on a
fixed or floating leg or another stock index.
The payments are based on the agreed
percentage of an underlying notional principal
amount.
 Example
Assume there is an investor who owns a total of $1,500 in
ZXC Corp stock. ZXC has offered all shareholders the option
to swap their stock for debt at a rate of 1:1, or dollar for dollar.
In this example, the investor would get $1,500 worth of debt
if he or she elected to take the swap.
If, on the other hand, the company really wanted investors to
trade shares for bonds, it can sweeten the deal by offering a
swap ratio of 1:1.5. Since investors would receive $2,250 (1.5
* $1,500) worth of debt, they essentially gained $750 for just
switching asset classes.
However, it is worth mentioning that the investor would lose
all respective rights as a shareholder, such as voting rights,
if he swapped his equity for debt
Terminologies
 Counterparties: The parties on either side of
an interest rate swap or a currency, equity or
commodity swap,
 Swap dealers/ market maker: An individual
who acts as the counterparty in a swap agreement
for the fee (called a spread).
 Effective/value date: the date the swap begins to
accrue interest i.e. the date on which swap
agreement take affect.
 Termination/maturity date: The day on which a
swap contract becomes invalid and no further
exchanges will occur. A final payment is made upon
a swap's termination.
 Swap tenor / maturity: agreed-upon life of the transaction
 Swap coupon: A conventional fixed-for-floating in
interest-rate swap, currency swap etc
 Reference rate: It is a rate that determines pay-offs in a
financial contract and that is outside the control of the
parties to the contract. It is often some form of LIBOR rate,
but it can take many forms, such as a consumer price
index, or a house price index.
 Reset dates: the dates at which recalculations will be
made in terms of the difference between the fixed and
floating rates
 Notional principal amount: Each period's rates are
multiplied by the notional principal amount to determine
the value of each counterparty's payment.