An interest rate swap which involves the exchange of the interest payments based on two different rates (one of them is a base rate), with the cashflows being typically settled as a net amount reflecting in the difference between the two rates. This swap allows investors to exchange a floating rate of interest into a fixed rate and vice versa. In other words, it can be used to convert a floating-rate debt into a fixed-rate debt or a fixed-rate debt into a floating-rate debt. For example, firms that borrow at a margin over a floating rate will incur additional costs if rates increase. It is possible to eliminate interest rate upside risk by entering into a base rate swap to exchange its floating rate for a fixed rate. In this sense, this swap can provide protection against the risk of rising rates.

This arrangement is flexible, that is, the swap can be unwound before its maturity date, though in such cases a settlement value has to be paid based on the prevailing base rate at the point of early termination.