What is a 'Basis Rate Swap'
A basis rate swap is a type of swap in which two parties swap variable interest rates based on different money markets, usually to limit interestrate risk that a company faces as a result of having differing lending and borrowing rates.
For example, a company lends money to individuals at a variable rate that is tied to the London Interbank Offer (LIBOR) rate, but they borrow money based on the Treasury Bill rate. This difference between the borrowing and lending rates (the spread) leads to interestrate risk, so by entering into a basis rate swap, where they exchange the TBill rate for the LIBOR rate, they eliminate this interestrate risk.
BREAKING DOWN 'Basis Rate Swap'
Basis rate swaps are also known as floatingfloating interest rate swaps. These types of swaps allow the exchange of interest rate payments that are based on two different interest rates. This type of contract allows an institution to turn a floatingrate into a fixed rate and are generally used for exchanging liquidity. Usually, basis rate swap cash flows are netted based on the difference between the two rates of the contact. This is unlike typical currency swaps where all cash flows include interest and principal payments.
Basis Risk
Basis rate swaps help to mitigate basis risk, which is a type of risk associated with imperfect hedging. This type of risk arises when an investor or institution has a position in a contract or security that has at least one stream of payable cash flows and at least one stream of receivable cash flows, where the factors affecting those cash flows are different than one another and the correlation between them is less than one. Basis rate swaps can help reduce the potential gains or losses arising from basis risk, and because this is their primary purpose, are typically used for hedging. But, certain entities do use these contracts to express directional views in rates, such as the direction of LIBORbased spreads, views on consumer credit quality, and even the divergence of the Fed funds effective rate versus the Fed funds target rate.
Types of Basis Rate Swaps
While these types of contracts are custom between two parties and not exchangetraded, four of the more popular basis rate swaps include LIBOR/LIBOR, Fed funds rate/LIBOR, prime rate/LIBOR, and prime rate/Fed funds rate. Payments on these types of swaps can be customized, but it is very common for the payments to occur quarterly.

Forward Swap
A forward swap is an agreement between two parties to exchange ... 
Swap Curve
A swap curve identifies the relationship between swap rates at ... 
Swap Rate
The swap rate is the fixed portion of a swap as determined by ... 
Absolute Rate
The absolute rate is the fixed portion of an interest rate swap, ... 
Amortizing Swap
An amortizing swap is an exchange of cash flows, one fixed rate ... 
Swap
A swap is a derivative contract through which two parties exchange ...

Trading
An Introduction To Swaps
Learn how these derivatives work and how companies can benefit from them. 
Trading
Currency Swap Basics
Find out what makes currency swaps unique and slightly more complicated than other types of swaps. 
Trading
Different Types of Swaps
Identify and explore the most common types of swap contracts. Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific ... 
Investing
The FastPaced 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 stepbystep explanation of how it works. 
Investing
The Advantages Of Bond Swapping
This technique can add diversity to your portfolio and lower your taxes. Find out how. 
Trading
Hedging with currency swaps
The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it with currency swaps. 
Managing Wealth
Managing interest rate risk
Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate and directly affects the values of fixedincome securities. 
Investing
Harvard Gets a Failing Grade on InterestRate Swaps
Harvard is among scores of colleges and universities spaying the price for investing in interestrate swaps that imploded during the financial crisis. 
Investing
Santander, Portugal Reach Swaps Settlement (
Interest rate swap agreements will cost Portugal $1.8 billion and help Santander get some new loans on its books. 
Investing
SPXU: ProShares UltraPro Short S&P500 ETF
Find out information about the ProShares UltraPro Short S&P 500 exchangetraded fund, and learn detailed analysis of its characteristics and suitability.

What is the difference between derivatives and swaps?
Swaps comprise just one type of the broader asset class called derivatives. Read Answer >> 
When was the first swap agreement and why were swaps created?
Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >> 
How does an entrepreneur choose a business structure?
Learn more about interest rate swaps and currency swaps, how these swaps are used and the difference between interest rate ... Read Answer >> 
What is a Debt for Equity Swap?
Learn why companies issue debt for equity swaps, what they are, and how they impact shareholders and debt holders. Read Answer >> 
What is the difference between derivatives and options?
A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >> 
What Derivatives are Types of Forward Commitments?
There are three main types of derivatives with forward commitments: forward contracts, futures contracts and swaps. Learn ... Read Answer >>