Reverse Swap

AAA

DEFINITION of 'Reverse Swap'

An exchange of cash flow streams that undoes the effects of an existing swap. Reverse swaps are used, instead of simply canceling the original swap, because they allow investors to avoid negative tax or accounting implications.


Reverse swaps also allow investors to mitigate the original risk that they are exposed to upon entering a swap, or to cancel a position if they feel that market conditions will change in such a way as to give the original swap a negative value.

INVESTOPEDIA EXPLAINS 'Reverse Swap'

Swaps are private transactions that are traded over the counter, and as such are subject to credit risk. These contracts exchange assets, liabilities, currencies, securities, equity participations and commodities. They are generally used for risk management by institutions, and are less common among individual investors.

RELATED TERMS
  1. Forward Exchange Contract

    A special type of foreign currency transaction. Forward contracts ...
  2. Cash Settlement

    A settlement method used in certain future and option contracts ...
  3. Yield

    The income return on an investment. This refers to the interest ...
  4. Bermuda Swaption

    A derivative financial instrument that gives the holder the right, ...
  5. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  6. Option

    A financial derivative that represents a contract sold by one ...
Related Articles
  1. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  2. Credit Default Swaps: An Introduction
    Bonds & Fixed Income

    Credit Default Swaps: An Introduction

  3. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  4. The Advantages Of Bond Swapping
    Bonds & Fixed Income

    The Advantages Of Bond Swapping

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center