What are Swaps? Financial Derivatives Tutorial

In todays video we learn about Swaps.

What is a Swap?

A swap is a financial derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. For example, in the case of a swap involving two bonds, the two parties would be exchanging the periodic interest (coupon) payments associated with the bonds. With a swap the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.

The cash flows are calculated over a notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral.

Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.

[arga]

"This is really simple"
*Proceeds to explain something super complicated*
I wish I had found you sooner Patrick, your work is amazing thank you

[andrewsalmon]

Omg. This is exquisite. I am paying attention to finance derivatives and swaps and this talk is filling so many gaps. I might just get this.

[gilessamarawikrema]

Loved this presentation, both the content and the delivery

[commontater]

This guy is amazing. Explaining the underlying simplicity beneath financial complexity.

[linkz]

Thank you so much. Now I know more about the swap.

[nightwolf]

I worked for a convert-arb hedge fund, where we had to manage optionality and interest rate risk almost on a daily basis. You should do a video on Swap-tions.

[mikestanmore]

"The first thing that happens" is you've lost a friend, and there's a contract out on a burger flipper! ;-)
(Great explanation, BTW. Thankyou.)

[paullloyd]

Well done. Your presentations are fabulous. One could make a point in favor of different forms of derivatives (in your example of swaps). One could also make a point against derivatives (credit default swaps, synthetic CDO’s) and the countless bets made by pure speculation. Perhaps a video on what was done prior to the 1st swap you made as an example (prior to 1981). And the overall size of the derivative markets combined? And the inherent danger of these derivatives going wildly wrong.

[poohshmoo]

On this channel I hit the like button before watching the video.

[egal]

The quality really skyrocketed, I Hope that you'll continue Like this :)

[qudizzle]

I Still love reviewing these orders videos, great educational content !

[OdedErell]

Thanks for your very informative videos!
At about ~7:30 in this video, you are actually explaining what happened 4 months ago in the US regional banks. That's awesome! :-)

[Szoki]

Wonderful explanations! I love this chanel, just subscribed. Thank you for the inspiration! May I ask if you tend to own a Range Rover by any chance?

[kademan]

God damn boy you are GOLDEN in this video

[rk-zssy]

Can you do a video explaining how to keep your head so still?

[NandoUnterman]

Thank you Patrick, always great content!!

[UFCPR]

Halfway through the video, I came to realize that it's essentially of a doctoral or PhD level! It will require extensive research and reading numerous books, papers, and watching videos for months to grasp even a portion of it.

[ronenoren]

Hello Patrick, thanks for the explanation. As I understand, retail investors cannot participate in swap trading. Do you know a way to emulate interest rate swap at a retail level ?

[weathermayne]

Hi. I know I’m asking an new question on an old video: could you redo- this video in relation to the recent regional bank failures? Or I’d like to hear how an individual can write something like this on an ARM loan for a residential home purchase.

[poohshmoo]

Somehow youtube algorithm figured out I need better understanding how and why Archegos blew up