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 interestrate swap plus a swaption for two times the notional principal amount of the interestrate swap. If the notional principal amount of the interestrate 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 interestrate risk include plain vanilla swaps, constant maturity swaps, airbag swaps, forward rate agreements and many others.

Asset Swap
Similar in structure to a plain vanilla swap, the key difference ... 
Callable Swap
An exchange of cash flows in which one counterparty makes payments ... 
Call Swaption
A type of option between two parties that can be exercised on ... 
Putable Swap
An exchange of cash flows in which one counterparty makes payments ... 
Delayed Rate Setting Swap
An exchange of cash flows, one of which is based on a fixed interest ... 
Swap Rate
The rate of the fixed portion of a swap as determined by its ...

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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 >> 
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 DoddFrank on swaps ... Read Answer >> 
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 >> 
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 >> 
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 >> 
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 >>