An agreement between two parties to exchange cash flows based on different conditions or underlying assets. Swaps allow each party to manage risks or access assets they otherwise could not easily obtain.
Company A has a loan with a 5 percent fixed interest rate but expects rates to fall. Company B has a loan with a floating interest rate and expects rates to rise. They swap payment obligations, so Company A pays Company B's floating rate and Company B pays Company A's fixed rate.
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