Plain Vanilla Swap

What is a 'Plain Vanilla Swap'

A plain vanilla swap is the most basic type of forward claim that is traded in the over-the-counter market between two private parties, usually firms or financial institutions. There are several types of plain vanilla swaps, such as the plain vanilla interest rate swap, the plain vanilla commodity swap and the plain vanilla foreign currency swap.

BREAKING DOWN 'Plain Vanilla Swap'

In a plain vanilla interest rate swap, Company A and Company B choose a time frame, a principal amount, a single currency, a fixed interest rate, a floating interest rate and payment dates. On the specified payment dates for the duration of the time frame, Company A pays Company B a fixed rate of interest on the principal amount, and Company B pays Company A a floating interest rate on the principal amount. All payments are made in the same currency and only the net sum of each payment exchanges hands. The purpose of such an exchange might be to reduce interest-rate risk.

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RELATED FAQS
  1. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
  2. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
  3. Do interest rate swaps trade on the open market?

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  4. What is the difference between derivatives and swaps?

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  5. Can bond traders trade on interest rate swaps?

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  6. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
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