Definition of Swap

Swap is a term used to refer to an exchange or swap between two entities or individuals involving assets, services or liabilities. Swaps can occur in a variety of contexts, including finance, trade, technology and more. In a financial context, a swap refers to a contract between two parties who agree to exchange payment streams or financial benefits.

Types of Swaps

Understanding the types of swaps also allows one to choose an instrument that suits their needs and objectives. The following are some of the common types of swaps used in the financial market, namely:

1. Interest Rate Swap
   Being the most common type of swap, in an interest rate swap, two parties agree to exchange a stream of interest payments based on a fixed rate and a variable rate. The aim is to manage interest rate risk or capitalize on interest rate differences between two parties.
2. Equity Swap
   An equity swap involves exchanging payment streams that are based on the performance of a particular stock or stock index. Equity swaps are used to gain exposure to a stock or stock index without having to buy physical shares. They can be used for speculation, hedging, or other purposes.
3. Currency Swap
   A digital currency swap involves the exchange of interest and principal payments in different currencies between two parties. Currency swaps are used to protect against currency exchange rate risk or to gain access to currency needed for business or investment activities.
4. Commodity Swap
   A commodity swap involves the exchange of means of payment based on the price or performance of a particular commodity. It allows the parties involved to manage commodity price risk or gain exposure to a particular commodity without physical ownership.
5. Crypto Asset Swap
   Crypto Asset Swap refers to the exchange of crypto assets between two parties through a Swap contract. Some commonly used types of crypto asset swaps are Crypto-to-Crypto Swap, Stablecoin Swap, Fiat-to-Crypto Swap, Leveraged Swap, Decentralized Finance (DeFi) Swaps, Cross-Chain Swaps, and Wrapped Asset Swaps.