From the course: Derivatives Fundamentals

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Introduction to swap contracts and their structure

Introduction to swap contracts and their structure

From the course: Derivatives Fundamentals

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Introduction to swap contracts and their structure

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- [Instructor] Now let's turn our attention to Swap Contracts. Let's start by asking the question, what is a Swap Contract? Well, a swap contract is a derivative in which two counterparties exchange cash flows, which we often call legs, over a period of time. Often, one leg will be a fixed payment, while the other will be a floating payment. Here, we have an example, a visual example of a swap where two counterparties are swapping three payments. The floating leg is represented by the wavy line, the fixed leg is represented by the straight line. One payment will be swapped on January 1st, 2020, the next one six months later, with the final one on the maturity date being the expiration of the swap. Let's look at some of the aspects of a swap contract in more detail. There are typically six major components to a swap contract. First of all, we need to understand what the underlying asset is. It could be, for example, a fixed coupon bond, a floating rate note, or an equity. Next, we need…

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