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FX Swap is a purchase of one currency against another at an initial date and an agreement to reverse that transaction at a future date and at a specified rate. The difference between the exchange rate applying initially and the rate at which the swap is reversed reflects the interest differentials between the two currencies concerned (the forward points). Initially used to extend or match cashflows with the physical delivery of imports or exports, FX swaps have come to be used also as a funding mechanism against short-term borrowings or by the professional market to speculate on interest-rate movements.

Interest Rate Swap is a contractual agreement entered into between two counterparties under which each agrees to make periodic payment to the other for an agreed period of time based upon a notional amount of principal. The principal amount is notional because there is no need to exchange actual amounts of principal in a single currency transaction: there is no foreign exchange component to be taken account of. Equally, however, a notional amount of principal is required in order to compute the actual cash amounts that will be periodically exchanged.

Under the commonest form of interest rate swap, a series of payments calculated by applying a fixed rate of interest to a notional principal amount is exchanged for a stream of payments similarly calculated but using a floating rate of interest. This is a fixed-for-floating interest rate swap. Alternatively, both series of cashflows to be exchanged could be calculated using floating rates of interest but floating rates that are based upon different underlying indices.

Currency Swap is also known as cross-currency swap, cross-currency and interest-rate swap, currency coupon swap. It is a swap where the counterparties exchange equal principal amounts of two currencies at the spot exchange rate. During the life of the swap the counterparties exchange fixed or floating-rate interest payments in the swapped currencies and at maturity the principal amounts are again swapped at a predetermined rate of exchange (usually also the initial spot rate). The customer can determine whether the principal exchange is needed.

1. To obtain lower cost funding
2. To hedge interest rate exposure
3. To obtain higher yielding investment assets
4. To create types of investment asset not otherwise obtainable
5. To implement overall asset or liability management strategies
6. To take speculative positions in relation to future movements in interest rates.

The advantages of interest rate swaps include the following:
1. A floating-to-fixed swap increases the certainty of an issuer's future obligations.
2. Swapping from fixed-to-floating rate may save the issuer money if interest rates decline.
3. Swapping allows issuers to revise their debt profile to take advantage of current or expected future market conditions.
4. Interest rate swaps are a financial tool that potentially can help issuers lower the amount of debt service.