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A swap is a derivative contract where two parties exchange financial instruments. The cash flows are calculated over a notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.
Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement. Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange, the largest U. At the end of 2006, this was USD 415. The CDS and currency swap markets are dwarfed by the interest rate swap market. All three markets peaked in mid-2008. As the International Finance in Practice box suggests, the market for currency swaps developed first. Today, however, the interest rate swap market is larger.