swap investment & finance definition

A custom-made and negotiated transaction designed to manage financial risk over a period of 1 to 12 years. Two individuals can create a swap, or a swap may be made through a third party such as a brokerage firm or a bank. Swaps are used to manage risk and often settlements occur in cash, not in delivery of the actual product or financial instruments. Examples of swap transactions include currency swaps, interest rate swaps, and price swaps for a variety of commodities. An example of a currency swap is an agreement to sell $1 million of Japanese yen three months in the future at ¥116.50.