SWAPS: Commodity, Currency, Interest Rate, and Equity
Swaps are non-standardized contracts which are traded Over-the-Counter (OTC). However, since swaps started to trade, swaps transactions have conformed to various conventions.
Swaps are contracts which exchange assets, liabilities, currencies, securities, equity participations, and commodities. These exchanges can be relatively straight forward such as floating for fixed rate or Japanese Yen for British Pound Sterling.
Or, swaps can be complex by incorporating multiple currencies, interest rates, commodities and options.
Either way, swaps are viewed as flexible in terms of specifications such as pricing or evaluation benchmarks, timing or contractual horizons, settlement procedures, resets, and other variables.
One of the simplest ways to view swaps is from the perspective of a financial spread. Spreads entail a simultaneous long leg (position) and a short leg (position). For example, you can be long to collect fixed coupons and short to pay floating rates such as LIBOR plus.
From a foreign exchange perspective, you may be long British Pounds and short Japanese Yen.>
Generally, swaps are used for risk management. However, swaps are also used for investing and speculative purposes.
Important institutional users are: banks, brokers, dealers, B/Ds, corporations, producers, users/consumers, and other organizations. Some qualified individuals may also be suitable users of these basic derivatives products.
It should be noted that futures are often used to adjust the risk exposures or profiles of existing swaps positions. This is particularly the case when there are few or no contra-balancing transactions to match or even-up the swap book.
The following lists highlight common swaps transactions.
A non-exhaustive listing of other features or optional characteristics includes:
Options on swaps are called swaptions. The basic types are puttable (puts) and callable (calls). The principles and strategies are similar to those available for traditional puts and calls.
For more information, this online site contains many references for Derivatives. The following listing highlights some of these reference resources.
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