Name

Description

Generic swap

Is the most basic swap, which transforms floating rate interest payments into fixed rate payments for one party, and vice versa for the counterparty to the contract.

Swaption

It is a type of contract that gives the holder a right to buy or sell a swap, i.e., an option to exchange cash flows.

Basis index swap

It is an agreement to exchange the interest payments based on different indexes and used by counterparties to reduce their risk exposure resulting from a nonlinear movement in interest rates across two different indexes.

Yield curve swap

It is a contract to exchange interest payments indexed to a long-term rate with those indexed to a short-term rate for one party, and vice versa for the counterparty.

Forward Rate Agreement (FRA)

It is an extension of a forward contract except that, unlike the single payment feature of forward contracts, an FRA can incorporate multiple periodic payments.

Cap

It is an agreement that permits the buyer to receive the difference in the interest cost on a specified notional amount if the interest rate rises above the stipulated “cap rate.”

Collar

It is a combination of a cap and floor agreement, in which the buyer purchases an interest rate cap while selling a floor indexed to the same interest rate. The name “collar,” is because they have the effect of limiting the effective borrowing rate between the cap rate and the floor rate.

Nonpar swap

The interest rates used in a nonpar swap are different than the market interest rates for par-value bonds. It is different from most other swaps. Thus, one party may be required to make a payment at contract initiation. The nonpar swaps are typically used to offset existing par swap positions, the underlying interest rates for which may have changed since their inception.

Zero coupon swaps

It is an agreement where one counterparty makes only one payment at the termination of the swap, analogous to a zero-coupon bond. The other party makes periodic fixed or floating rate payments.

Floor

It is analogous to a cap, except that a payment is triggered by interest rates falling below a specified threshold.

Caption

It is a contract that gives the holder a right to buy a cap should the stipulated conditions be met.