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A swap is a type of derivative in which two parties can exchange cash
flows of one party's financial asset for those of the other party's financial
instrument. The benefits in question depend on the type of financial
instruments involved. For example, in the case of a swap involving two of bonds,
the benefits in question can be the periodic interest payments associated with
such bonds. Specifically, two counter parties agree to exchange one stream of cash
against another stream. These streams are called the legs of the swap.
The swap agreement defines the dates when the cash flows are to be paid and the
way they are accrued and calculated. Usually at the time when the contract is
initiated, at least one of these series of cash flows is determined by an
uncertain variable such as a variable interest rate exchange rate, equity
price, or commodity price.
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