Interest rate swaps are used by banks and other financial institutions as a means of hedging their interest rate exposures

The reason that banks use interest rate swaps is that they help to manage their interest rate risk Interest rate risk is the risk that a banks net income will be adversely affected by changes in interest rates Interest rates are constantly changing, and there is always the possibility that interest rates will go up, rather than down Banks try to manage this risk by either selling or buying interest rate swaps

In a typical interest rate swap, the bank sells an interest rate, which is usually based on the LIBOR, in exchange for a fixed interest rate The bank is, in effect, selling the floating rate risk from its deposit portfolio to the counterparty, who is then assuming the risk In a typical interest rate swap, the bank sells an interest rate, which is usually based on the LIBOR, in exchange for a fixed interest rate

An interest rate swap is a contract between two parties, each of whom agrees to make periodic payments to the other party In an interest rate swap, one party agrees to make payments based on a fixed rate, and the other party agrees to make payments based on a floating rate, usually the LIBOR The two parties exchange the payments, so that the party receiving the fixed rate makes payments to the party receiving the floating rate

In an interest rate swap, the floating rate is usually based on the LIBOR The LIBOR is an acronym for the London Interbank Offered Rate, which is an interest rate based on the interest rates at which banks lend unsecured funds to other banks