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. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
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 ... Read Full Answer >>
  2. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  3. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  4. How can I calculate the Macaulay duration of a zero-coupon bond?

    The funds from operations is a measure of the amount of cash flow that a business's operations generates. Real estate investment ... Read Full Answer >>
  5. How does an entrepreneur choose a business structure?

    Swaps are derivative contracts between two parties that involve the exchange of cash flows. Interest rate swaps involve exchanging ... Read Full Answer >>
  6. When was the first swap agreement and why were swaps created?

    Swap agreements originated from agreements created in Great Britain in the 1970s to circumvent foreign exchange controls ... Read Full Answer >>
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