ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

The Five Types of Swaps in Financial Markets

Updated on January 30, 2012

Swaps

Equity Swaps, Interest Rate Swaps, Currency Swaps, Commodity Swaps and Credit Swaps are the five different types.

An equity swap can be comprised of a basket of stocks or a single stock or a stock index. In terms of commodity swaps, the underlying asset is usually crude oil even though it really includes all types of goods. Currency swaps and Interest Rate swaps are motivated by comparative advantage. During the recession of 2008, a phrase that came into prominence was the credit default swap (CDS). It can be a difficult concept to grasp. Basically, if the bond or a loan is defaulted, the buyer of the CDS stands to benefit by getting a big payoff.


Equity Swap

An equity swap is a type of Delta One product. This is really great for meeting an investor’s diversification goals because it combines several underlying securities and therefore the owner has a simple approach to use a single product to get the exposure of a basket of securities. Equity swaps are great investment tools to offer an investor leverage like derivative products. Lets look at an example to illustrate how great they can be. If X owns 100 shares of a Technology Company and believes that he will see a drop in the share price of that firm, he could utilize an equity swap to mitigate risk. He does this so that he doesn’t lose any voting rights he has on the board and at the same time does not get affected by any returns on the stock.

Interest Rate Swap

Interest rate swaps are great for speculating and hedging and the two parties involved will now exchange cash flows on the interest rate. There are different types and they can be for different currencies as well. Fixed-for-floating rate swaps, floating-for-floating rate swaps and fixed-for-fixed rate swaps are all done with this derivative instrument. Interest rate swaps are great for arbitrage as well.

Currency Swap

The idea of comparative advantage is what fuels a currency swap which has two primary uses. One is to get inexpensive debt by borrowing at the best rate in the market irrespective of currency and then exchanging for debt in the currency that an investor wants. The second use is to lessen the exposure to movements in the exchange rate which is also a way to hedge.

Commodity Swap

A commodity swap is a great way to capitalize on the market price of a commodity by getting some fixed payments after paying a fixed price to a financial institution. This is how a user of a commodity would invest in this type of swap but there is also a way for a producer to receive fixed income for the commodity by compensating the market price to a financial institution. Oil is the commodity that is mostly used.

Credit Default Swap

Although, credit default swaps have been given a lot of coverage, they are definitely the easiest type of swap for me to understand. I really want to go into more detail with this in another post and with other different types of swaps that I have mentioned here. For now, just wanted to let you know that this was how John Paulson was able to make $3.5 billion in 2007.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://corp.maven.io/privacy-policy

Show Details
Necessary
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Marketing
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Statistics
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)