Swap is a term that describes a bilateral transaction where two institutions exchange cash flows based on separate indices. A swap has a start date, a maturity date, and a principal amount on which the cash flow payments are calculated. The simplest example is an interest rate swap. There is no principal exchange, only interest payments. One party pays a fixed interest rate to the other party and, in return, receives a variable interest rate, typically LIBOR. Swaps are used for both hedging and trading purposes.
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