In finance, what does the term "swap" specifically involve?

The term "swap" in finance refers specifically to the exchange of cash flows or assets at a future date. This financial agreement typically involves two parties agreeing to exchange cash flows based on different financial instruments, which can include interest rates, currencies, or commodities. For example, in an interest rate swap, one party might agree to pay a fixed interest rate while receiving a variable interest rate from the other party. This mechanism allows entities to manage risk, hedge against interest rate fluctuations, or speculate on future changes in market conditions.

Swaps are used extensively in various financial markets and can help organizations optimize their capital structures or achieve desired risk profiles. The structure of these agreements provides flexibility in managing cash flows over time, making them a valuable tool in finance.