An offsetting or opposing swap which is designed to close out the market exposure of an existing swap position. For example, a fixed-rate-paying party to an interest rate swap could enter into a contra swap to cancel the original agreement, whereby that party become a floating rate payer . This has the effect of reversing (unwinding) the swap position, rather than simply cancelling it. The reverse swap is written with the original counterparty, and hence it helps reduce credit risk, since all negative flows under the original agreement are applied against positive flows under the second agreement.
It is also called a mirror swap or an offsetting swap.
Comments