A swap is a derivative contract where two parties agree to exchange cash flows or other financial variables over specified periods. Common swap types include interest rate swaps (fixed for floating), currency swaps (different currencies), and commodity swaps (fixed for floating commodity prices). Swaps enable efficient risk management and arbitrage opportunities.

Swaps are primarily traded over-the-counter between sophisticated counterparties, though regulatory changes have increased standardization and central clearing requirements. These instruments provide flexible tools for managing various financial risks while enabling speculation on interest rates, currencies, and commodity prices.

Real-world example: A corporation enters an interest rate swap to pay 3% fixed rate while receiving floating SOFR rates on $100 million notional amount, converting variable-rate debt to fixed-rate financing and eliminating interest rate risk.