Swaps

A swap is an agreement to exchange assests. This could refer to interest rates, currency, equaity and commodities.

A swap allows a company to transfer its liabilities to better match their assets. It could allow them to borrow more cheaply, or to gain/reduce exposure to a desierd market.

For example, a finance company like US Bank makes a fixed-rate car loan to a customer. Then, the loan is an esset to US Bank, and is funded by borrowing at a floating rate (LIBOR plus haircut) A company that wants to raise funds, may issue bonds that must be paid back at the agreed-upon fixed rate. The loans are the company's liabilities, and the cash raised is its assets. If the funding cost of the bonds is lower than the interest income earned, then the company profits.