An interest rate swap whereby two floating rate payments in the same or different currencies are exchanged. A premium or discount on one side of the swap is usually applied to reflect differences between the two exchanging counterparties’ cash flows, particularly in terms of credit quality and duration. For example, a treasury rate could be exchanged for a Eurodollar rate to enable the counterparties to exchange the credit quality of their cash flows. A basis rate swap, therefore, provides an instrumental method to manage a counterparty’s liability exposure to interest rates.
The basis rate swap is also known as a basis swap and floating-for-floating swap.
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