Types of Swaps

A commodity swap is a contract where two sides of the deal agree to exchange cash flows, which are dependent on the price of an underlying commodity. A commodity swap is a contract where two sides of the deal agree to exchange cash flows, which are dependent on the price of an underlying commodity.

What is 'Credit Default Swap - CDS' A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract.

A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest and sometimes of principal in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract.

Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount.

What is a 'Total Return Swap' A total return swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans or bonds. The asset is owned by the party receiving the set rate payment.

A zero coupon swap is an exchange of income streams in which the stream of floating interest-rate payments is made periodically, as it would be in a plain vanilla swap, but the stream of fixed-rate payments is made as one lump-sum payment when the swap reaches maturity instead of periodically over the life of the swap.