Swaps are derivatives based on interest rates and other economic variables. The contract allows two parties to exchange liabilities. The principal of the swap is typically a security, like cash or an asset. The price of the asset does not move between multiple hands. In a typical swap, one party receives a fixed cash flow while the other party receives a variable cash flow. This enables the exchange of two different forms of risk.
A swap contract will last as long as either side wants it to. The duration can be as short as five days or as long as a year. The duration of a swap contract depends on the underlying asset. A swap contract may last for many years, or it can be as short as a few weeks. Before 2010, swap contracts did not trade on public exchanges. They were unregulated, so they were not available for public trading.
Swaps are typically made with a fixed and variable interest rate. The fixed and variable sides are both backed by fixed and floating interest rates. This flexibility allows the contract to be flexible and be executed with the flexibility that each party needs. The contract may be structured as a short-term or long-term transaction. The payment period of the contract may be a month, quarter, or yearly. Often, interest payments are made quarterly, monthly, or on a different schedule.