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.



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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 >>
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