In its simplest form, swap hedging represents a mechanism by which the swap dealer takes an equal and offsetting Treasury position when adding a swap to his books (swap books). Typically after a client chooses its fixed-rate payer side of the swap, the dealer will sell Treasuries to hedge the position. If the client wants to pay floating, the dealer will just do the opposite: buy Treasuries. Thereafter, the dealer holds these Treasury positions on his books until a chance presents itself, allowing him to enter into an opposite swap (mirror swap). At this stage, i.e., when the trade is matched, the dealer will unload the Treasury trade.

For trades with shorter maturities, the dealer may use futures to hedge the position. In turn, the market maker can hedge the Treasury component of the swap rate using futures or notes, though the resulting spread cannot be hedged effectively.