What Is Swapping In Business?

Swapping is the process of creating a contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Generally swapping involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything. Although, the principal does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating currency exchange rate or index price.