How Does a ‘Swap’ Derivative Function?
A swap is an agreement between two parties (counterparties) to exchange future cash flows based on two different underlying assets or rates over a specified period. The most common type is an interest rate swap, where one party exchanges fixed interest payments for floating interest payments.
Swaps are primarily used to hedge against interest rate or currency risk or to gain exposure to different markets.
Glossar
Future Cash Flows
Projection ⎊ Future Cash Flows, in the context of digital assets, represent the anticipated stream of economic benefits accruing to a token holder, typically derived from protocol fees, staking rewards, or other on-chain revenue mechanisms.
Fixed Interest Payments
Yield ⎊ Fixed interest payments, within cryptocurrency derivatives, represent predetermined cash flows exchanged between counterparties based on an underlying notional principal.
Currency Risk
Exposure ⎊ Currency risk, or exchange rate risk, represents the potential for financial loss arising from adverse movements in the exchange rate between two different currencies, a primary concern in global derivatives trading.
Underlying Assets
Foundation ⎊ The concept of Underlying Assets, within cryptocurrency, options, and derivatives, fundamentally establishes the reference point for valuation and risk assessment.