Swap
A swap defines underlying amounts, calculation rules, dates and settlement. In a plain interest-rate swap, counterparties commonly exchange fixed and floating interest amounts on a notional principal; in a currency swap, currency and principal exchanges may also be involved. An FX swap instead combines near and far opposite currency exchanges. A swap can reshape an exposure, but mismatch, counterparty, collateral and liquidity risks remain. Contract terms determine the flows; the word swap alone does not imply any particular instrument or exchange of principal.
Worked example
A borrower pays fixed 4% and receives a benchmark under an interest-rate swap while its loan costs that benchmark plus 1%. Ignoring mismatches, the combined cost is 5%; the swap does not repay the underlying loan.
Common mistake
Assuming every swap exchanges principal or treating the swap's notional amount as an additional loan.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |