What does Forward Swap mean?
A swap with a later start date. A forward swap is a contract between two parties to swap assets, interest rates, currencies, etc. at a future date. They are widely used by financial institutions and companies to hedge risk, match cash flow with requirement and for the purpose of arbitrage. Interest rate swaps are the most common example of forward swaps.
Futures Knowledge Explains Forward Swap
For example, company ABC takes a loan for $400 million at a fixed rate of interest and company XYZ takes a loan for $400 million at a floating rate of interest. Company ABC expects that the rate in future will reduce and thus wants to convert its fixed rate into a floating one. On the other hand, company XYZ perceives that the interest rates will increase in the future and want to convert into a fixed rate loan to safeguard itself. The companies may enter into interest rate swap to hedge their risk.
A forward swap is also known as a deferred start swap.