A ___________ is an agreement between two parties to

Solution

A swap is an agreement between two parties to exchange cash flows on a determined date or in many cases multiple dates. Typically, one party agrees to pay a fixed rate while the other party pays a floating rate. For example, when trading commodities the first party, an airline company relying of kerosene, agrees to pay a fixed price for a pre-determined quantity of this commodity. The other party, a bank, agrees to pay the sport price for the commodity. Hereby the airline company is insured of a price it will pay for its commodity. A rise in the price of the commodity is in this case paid by the bank. Should the price fall the difference will be paid to the bank. SWAPS can only have Currency & Interest rates as derivatives.  An interest rate swap is a financial derivative contract in which two parties agree to exchange their interest rate cash flows. The interest rate swap generally involves exchanges between predetermined notional amounts with fixed and floating rates. A Currency swaps are a foreign exchange agreement between two parties to exchange cash flow streams in one currency to another.  While currency swaps involve two currencies, interest rate swaps only deal with one currency.