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. Bermuda Swaption

    A derivative financial instrument that gives the holder the right, ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  5. Swaption (Swap Option)

    The option to enter into an interest rate swap. In exchange for ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
RELATED FAQS
  1. What is a debt/equity swap?

    Occasionally, a company will need to undergo some financial restructuring to better position itself for long term success. ... Read Full Answer >>
  2. How is reconciliation treated under generally accepted accounting principles (GAAP)?

    The generally accepted accounting principles, or GAAP, provide different reconciliation rules for balancing many kinds of ... Read Full Answer >>
  3. Where did the concept of reconciliation in accounting come from?

    Financial accountants perform reconciliation to ensure that the balances of two accounts are in agreement. The process by ... Read Full Answer >>
  4. Are all fixed costs considered sunk costs?

    In accounting, finance and economics, all sunk costs are fixed costs. However, not all fixed costs are considered to be sunk. ... Read Full Answer >>
  5. What is the difference between work in progress (WIP) and raw materials in accounting?

    Raw materials and works in progress (WIP) are distinct categories in financial accounting for business inventory. Each applies ... Read Full Answer >>
  6. How is accounting in the United States different from international accounting?

    Despite major efforts by the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, ... Read Full Answer >>
Related Articles
  1. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  2. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  3. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  4. Bonds & Fixed Income

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  5. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
  6. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  7. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  8. Economics

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  9. Economics

    How to Calculate Trailing 12 Months Income

    Trailing 12 months refers to the most recently completed one-year period of a company’s financial performance.
  10. Economics

    What is Unearned Revenue?

    Unearned revenue can be thought of as a "pre-payment" for goods or services which a person or company is expected to produce to the purchaser.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center