Interest rate swap

In a plain vanilla single-currency swap, principal is usually not exchanged; it is the calculation base. A floating-rate borrower that pays fixed and receives floating under a suitable swap can approximate fixed overall interest, after combining the loan and swap flows. Loan margins, mismatched reference rates and reset dates may leave residual exposure. Consider counterparty, collateral and liquidity terms. A swap changes the pattern of interest exposure but does not remove the original borrowing obligation or guarantee that the resulting cost will be lower than every future alternative.