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TeachMeFinance.com - explain Swap (transactions) swap -- (1) a technique of the Federal Home Loan Mortgage Corporation by which original lenders exchange the mortgages they have made for Freddie Mac Participation Certificates (PCs), which provide the lender with ownership interests in the same mortgages. Freddie Mac refers to the transaction as the Guarantor Program, because the corporation adds its own guarantees to the safety of the mortgage investment. (2) a financial transaction in which two counterparties agree to exchange streams of payments over a period of time according to a predetermined rule. For example, the counterparties may swap interest payments, with each paying the other's interest on the same amount of principal. Usually a fixed rate interest obligation is swapped for a floating rate interest obligation, so that both parties can match the form of interest they owe on their debts with the form of interest income they expect to receive on their assets -- fixed with fixed, or floating with floating. Or, the counterparties may swap payments in one denomination of currency for payments in another country's currency. Both interest rate swaps and currency swaps are designed to lessen market exposure of paying off debt in an environment of potentially changing interest rates . another definition... Swap (transactions) -- A kind of financial transaction which has many variations, usually highly complex. They generally involve a simultaneous exchange of assets (the swap) by counterparties for other different assets of comparable value. The assets may be commodities or they may be financial instruments involving interest rates , cash flows , foreign exchange , debts or equities. In addition to financial profits, the swaps have many purposes such as limiting risks, overcoming restrictions in certain markets, or balancing portfolios. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.