A
swap is a
derivative in which two
counterparties exchange cash flows of one party's
financial instrument 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
bonds, the benefits in question can be the periodic interest (
coupon) payments associated with such bonds. Specifically, two counterparties agree to exchange one stream of
cash flows 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
floating interest rate,
foreign exchange rate, equity price, or commodity price.