Interest rate swaps

In a plain-vanilla interest rate swap, one party pays a fixed rate and receives a floating rate (such as BBSW in Australia or SOFR in the US) on the same notional amount. Only the net difference changes hands. Companies use swaps to turn floating-rate loans into fixed-rate ones; banks use them to manage the mismatch between deposits and mortgages.

The swap rate is the fixed rate that makes the swap worth zero at the start. Swap rates are a key benchmark: Australian fixed mortgage rates, for example, tend to follow 2-5 year swap rates.

A swap's value changes as rates move. The fixed payer gains if rates rise. Risk is measured with DV01 (value change for a 0.01% rate move).