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Concept
Interest rate swap
Summary
In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations with forward rate agreements (FRAs), and with zero coupon swaps (ZCSs).
In its December 2014 statistics release, the Bank for International Settlements reported that interest rate swaps were the largest component of the global OTC derivative market, representing 60%, with the notional amount outstanding in OTC interest rate swaps of 14 trillion.
Interest rate swaps can be traded as an index through the FTSE MTIRS Index.
An interest rate swap's (IRS's) effective description is a derivative contract, agreed between two counterparties, which specifies the nature of an exchange of payments benchmarked against an interest rate index.
The most common IRS is a fixed for floating swap, whereby one party will make payments to the other based on an initially agreed fixed rate of interest, to receive back payments based on a floating interest rate index.
Each of these series of payments is termed a "leg", so a typical IRS has both a fixed and a floating leg.
The floating index is commonly an interbank offered rate (IBOR) of specific tenor in the appropriate currency of the IRS, for example LIBOR in GBP, EURIBOR in EUR, or STIBOR in SEK.
To completely determine any IRS a number of parameters must be specified for each leg:
the notional principal amount (or varying notional schedule);
the start and end dates, value-, trade- and settlement dates, and date scheduling (date rolling);
the fixed rate (i.e. "swap rate", sometimes quoted as a "swap spread" over a benchmark);
the chosen floating interest rate index tenor;
the day count conventions for interest calculations.
Each currency has its own standard market conventions regarding the frequency of payments, the day count conventions and the end-of-month rule.
Official source
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