Reversible Swap

DEFINITION of 'Reversible Swap'

An exchange of cash flows that allows one counterparty to use a swaption to switch the payor and payee of the fixed and floating rate income streams. The counterparty who is making fixed payments and receiving floating payments would begin receiving fixed payments and making floating payments, and vice versa. A reversible swap consists of an interest-rate swap plus a swaption for two times the notional principal amount of the interest-rate swap. If the notional principal amount of the interest-rate swap was $100,000, the swaption would be for $200,000.

BREAKING DOWN 'Reversible Swap'

Reversible swaps are a type of interest rate swap. They allow investors to hedge against or speculate on possible changes in interest rates. One situation when a reversible swap would be desirable is when political instability makes interest rates especially unpredictable. Other types of financial instruments investors might use to manage interest-rate risk include plain vanilla swaps, constant maturity swaps, airbag swaps, forward rate agreements and many others.



RELATED TERMS
  1. Asset Swap

    Similar in structure to a plain vanilla swap, the key difference ...
  2. Callable Swap

    An exchange of cash flows in which one counterparty makes payments ...
  3. Putable Swap

    An exchange of cash flows in which one counterparty makes payments ...
  4. Call Swaption

    A type of option between two parties that can be exercised on ...
  5. Delayed Rate Setting Swap

    An exchange of cash flows, one of which is based on a fixed interest ...
  6. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
Related Articles
  1. Markets

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  2. Investing

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  3. Investing

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  4. Managing Wealth

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  5. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  6. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  7. Trading

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  8. Markets

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  9. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  10. Managing Wealth

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
  4. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
  5. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  6. Do interest rate swaps trade on the open market?

    Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center