Editing Derivative (finance) (section)

===Swaps===
A '''swap''' is a derivative in which two [[counterparty|counterparties]] [[trade|exchange]] cash flows of one party's [[financial instrument]] for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two [[Bond (finance)|bonds]], the benefits in question can be the periodic interest ([[Coupon (bond)|coupon]]) payments associated with such bonds. Specifically, two counterparties agree to the exchange one stream of [[cash flow]]s against another stream. These streams are called the swap's "legs". The swap agreement defines the dates when the cash flows are to be paid and the way they are [[Accrual|accrued]] and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a [[floating interest rate]], [[foreign exchange rate]], equity price, or commodity price.<ref name="hull"/>

The cash flows are calculated over a [[notional principal amount]]. Contrary to a [[futures contract|future]], a [[forward contract|forward]] or an [[option (finance)|option]], the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or [[collateral (finance)|collateral]].
Swaps can be used to [[hedge (finance)|hedge]] certain risks such as [[interest rate risk]], or to [[speculation|speculate]] on changes in the expected direction of underlying prices.

Swaps were first introduced to the public in 1981 when [[IBM]] and the [[World Bank]] entered into a swap agreement.<ref>{{cite book |title=Fundamentals of Corporate Finance |edition=9th | last1=Ross |last2=Westerfield |last3=Jordan |year=2010 |publisher=[[McGraw Hill]] |page=746 }}</ref> Today, swaps are among the most heavily traded financial contracts in the world: the total amount of interest rates and currency swaps outstanding is more than $348 trillion in 2010, according to the [[Bank for International Settlements]] (BIS).{{citation needed|date=December 2014}} The five generic types of swaps, in order of their quantitative importance, are: [[interest rate swap]]s, [[currency swap]]s, credit swaps, [[commodity swap]]s and [[equity swap]]s (there are many other types).