An interest rate swap that is entered into today, but it will come into effect at some agreed-upon future date. In business customary practices, a swap typically settles two business days after the trade date. Investors prefer sometimes to set up a swap at today’s market conditions, with the actual exchange of obligations being put off till a future date. In this sense, interest will not accrue till that specified date. Therefore, the forward delivery swap is the same as an ordinary swap (vanilla swap) except that payments don’t begin once it is established, but rather later in the future. Investors may use such a swap as a rate lock, i.e., they can preserve a current rate and apply it to their cash flows in the future when a different “unfavorable” rate prevails.
Derivatives
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