Swaps

Swap is a complex financial instrument. In a swap, two parties sign a contract where they agree to “swap” payment streams from a purchase or loan locally, thereby, reducing the requirement of actually moving the funds around. For instance, two companies can enter a swap agreement to swap 100 Million USD for equivalent Euros, to pay off a client. Instead of company A having to bear transaction costs of moving such large funds, they can have party B make the payment and conduct an equivalent transaction on their behalf. In case of fluctuations in the exchange rate, the respective parties pay the difference only.