A swap is a financial contract between two parties to exchange future payments over a set period of time. It consists of a series of payment periods, called swaplets. There are two legs associated with each party. Each leg could pay or receive fixed interest payments, floating interest payments, asset returns, or structured payments. Swaps are OTC derivatives that bear counterparty credit risk.
Swaps can be used to manage exposure to price fluctuations in market and can be also used to obtain a marginally lower cost. Thus they are often utilized by a firm that can borrow money easily at one type of interest rate but prefers a different type. They also allow investors to adjust exposure and offset risks. Speculators use swaps to speculate on market movement. More and more swaps are cleared through central counterparties nowadays (CCPs).