What is a swap?
A swap is a contract in which two parties undertake to exchange cash flows in a certain amount and conditions. In its basic concept, Token swap platform development swaps -a term taken from English- are a financial swap that establishes the agreement between two parties to exchange financial obligations, such as the payment of interest on a debt.
What is the purpose of a swap?
Essentially, the use or purpose of this financial instrument is to achieve a benefit or advantages regarding financing, interest rates or the profitability of a financial operation. Like other financial derivatives, the swap is frequently used as a means of hedging against risk.
The swap market
In general, swaps are agreed by and for the specific needs of the parties involved, so the swap market is not easily standardized and is considered an over-the-counter or secondary (OTC) market. However, the swaps market amounted to more than $363 trillion 1 by value (outstanding amount) in the first half of 2020, more than 73% of the total rate market and 60% of the global OTC derivatives market. .
How does a swap work?
The swap, although its exchange operation is relatively simple, can be a complex financial instrument and its use has little application for the small investor. In particular, it is a strategy used by large market players, such as banking institutions, companies and governments.
The purpose of a swap is to obtain a benefit on your payment obligations, for example to reduce the cost of financing, obtain some protection against the currency exchange rate, or reduce your exposure to changes in the interest rate. But… how do you obtain these more favorable conditions?
In a basic scheme of an interest rate swap, the parties may agree to exchange the cash flows under conditions such as the following:
Company A seeks to obtain a loan linked to the fixed interest rate. However, due to its specific conditions, you can only access the variable interest rate required by your bank A.
Company B wants to access financing with a variable interest rate, but has been conditioned to a fixed rate interest by its bank B.
Solution: a swap in which companies A and B agree to exchange their payment obligations, ie an interest rate swap. Company A will be able to make payments on a fixed rate, while receiving a variable interest rate from company B (and vice versa).
