Definition of Asset swap:
Arrangement in which one type of asset (such as one generating capital gain) is exchanged for another type (such as one generating regular income) to achieve better asset-liability matching.
An asset swap is similar in structure to a plain vanilla swap with the key difference being the underlying of the swap contract. Rather than regular fixed and floating loan interest rates being swapped, fixed and floating assets are being exchanged.
All swaps are derivative contracts through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount agreed upon by both parties. As the name suggests, asset swaps involve an actual asset exchange instead of just cash flows.
How to use Asset swap in a sentence?
- There are two parties in an asset swap transaction: a protection seller, which receives cash flows from the bond, and a swap buyer, which hedges risk associated with the bond by selling it to protection seller.
- An asset swap is used to transform cash flow characteristics to hedge risks from one financial instrument with undesirable cash flow characteristics into another with favorable cash flow.
- The buyer pays an asset swap spread, which is equal to LIBOR plus (or minus) a pre-calculated spread.
Meaning of Asset swap & Asset swap Definition