Chapter 9: Managing Market Risk with Swaps

In Chapter 8 we examined forward and futures contracts. Recall that these derivatives are contracts in which two parties agree that one party will buy an asset from another at a future date at a price they agree on at the start. Forward and futures contracts are sometimes called forward commitments, because they are agreements that commit each party to a transaction in the future at a price they agree on when the transaction is initiated. Swaps extend the idea of a commitment made in advance for a single transaction to a commitment made in advance for a series of transactions at different dates. Thus, in some sense a swap can be viewed as a portfolio of forward or futures contracts, though we will illustrate this point in more detail later and show that there are some technical differences.