Definition
A swap is a financial contract in which two parties agree to exchange streams of cash flows over time, often to manage risk, such as swapping fixed for floating interest payments.
Why It Matters
Swaps are widely used to hedge interest-rate, currency, or commodity risks, but they can also create counterparty risk if one side cannot pay.
Example
A company swaps a variable-rate loan payment for a fixed-rate payment to reduce uncertainty.