A swap that involves the exchange of principal and interest in one currency for the same in another currency. Two companies could arrange to swap currencies by establishing an interest rate, an agreed-upon amount and a common maturity date for the exchange.
Interest Rate Swap
An agreement between two parties where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.