Airbag Swap

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DEFINITION of 'Airbag Swap'

An interest rate swap whose notional value adjusts according to rising interest rates by indexing the floating portion to a constant maturity swap (CMS).

INVESTOPEDIA EXPLAINS 'Airbag Swap'

These swaps were created to hedge investments in areas where interest rate fluctuations have significant effects. Due to an increasing notional value, an asymmetrical payout schedule occurs whereby the swap's net payment with higher interest rates is greater than that occurring with lower interest rates.

RELATED TERMS
  1. Notional Principal Amount

    In an interest rate swap, the predetermined dollar amounts on ...
  2. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  3. Constant Maturity Swap - CMS

    A variation of the regular interest rate swap. In a constant ...
  4. Notional Value

    The total value of a leveraged position's assets. This term is ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Real Estate

    Land plus anything on it, including buildings and natural resources.
RELATED FAQS
  1. How can I use an "airbag swap"?

    An airbag swap is an interest rate swap designed to provide a cushion against rising interest rates. The airbag swap originally ...
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