A swap is a financial agreement between two parties to exchange assets that have cash flows for a set period of time. It is a derivative contract where one party exchanges or "swaps" the cash flows or value of one asset for another. Swaps can involve almost any financial instrument, but most swaps involve cash based on a notional principal amount). The two parties involved in a swap agree to exchange cash flows over a certain time period, such as a year, and the exact terms of the swap agreement are negotiated by the counterparties and are then formalized in a legal contract.

Swaps can be used for a variety of purposes, such as to manage risk, to obtain funding at a more favorable rate than would be available through other means, or to speculate on future differences between the swapped cash flows. For example, an entity receiving or paying a fixed interest rate may prefer to swap that for a variable rate (or vice-versa) . Swaps can also be used to hedge certain risks such as interest rate risk or currency risk.

There are different types of swaps, such as interest rate swaps, currency swaps, equity swaps, and variance swaps). Interest rate swaps are the most common type of swap and involve exchanging fixed-rate payments for variable-rate payments. Currency swaps involve exchanging cash flows in different currencies). Equity swaps involve exchanging future cash flows between two parties where one leg is an equity-based cash flow such as the performance of a stock asset, a basket of stocks, or a stock index). Variance swaps are over-the-counter instruments that allow investors to trade future volatility.

Swaps are traded over-the-counter (OTC) and are not traded on exchanges. Counterparties in swaps are usually companies and financial organizations and not individuals, because there is always a high risk of counterparty default in swap contracts. Swaps are complicated investments that require a great deal of experience and knowledge, and are generally not meant for the average investor.