What is swap? Types of Swap. Objective of swap.

Ans:- In finance, a swap is a derivative contract between two parties to exchange financial
instruments or cash flows over a specified period of time. Swaps are typically used to hedge risk
or to gain exposure to different types of assets. The two most common types of swaps are
interest rate swaps and currency swaps, but there are other variations as well.

1. **Interest Rate Swaps**: In an interest rate swap, two parties agree to exchange interest rate
payments. Typically, one party pays a fixed interest rate while the other pays a floating interest
rate (such as the LIBOR rate). The objective of an interest rate swap can be to hedge against
interest rate risk or to take advantage of differences in interest rate expectations.

2. **Currency Swaps**: A currency swap involves exchanging cash flows denominated in

different currencies. This is often done to hedge against currency risk or to obtain lower
borrowing rates in a different currency.

Other types of swaps include:

- **Commodity Swaps**: These involve the exchange of cash flows based on the price of a
commodity, such as oil or gold.

- **Credit Default Swaps (CDS)**: CDS are derivatives that allow investors to hedge against the
risk of default on loans or bonds.

- **Equity Swaps**: In an equity swap, two parties exchange the returns (including dividends
and capital appreciation) of two different stocks or stock indices.

The objectives of using swaps can vary depending on the needs of the parties involved. Some
common objectives include:

1. **Risk Management**: Swaps can be used to hedge against various types of risks, such as
interest rate risk, currency risk, or commodity price risk.

2. **Cost Reduction**: Swaps can help reduce borrowing costs by allowing parties to access
funding at more favorable interest rates or in different currencies.

3. **Asset-Liability Management**: Swaps can be used by financial institutions to better match

their assets and liabilities, thereby reducing risk.

4. **Speculation**: Some market participants use swaps to speculate on changes in interest

rates, currency exchange rates, or other financial variables.