Swap

Tax Glossary Definition

Swap

In finance, a swap is a derivative contract in which two parties agree to exchange a series of cash flows over a predetermined period, typically based on different financial instruments or interest rate structures. The most common form, an interest rate swap, involves one party paying a fixed interest rate while receiving a floating (variable) rate from the other, allowing both to manage exposure to interest rate fluctuations or adjust funding costs.

Example: A company with a variable-rate loan may enter into an interest rate swap to exchange its floating payments for fixed ones, thereby stabilizing future interest expenses.

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