An interest rate swap is an agreement to exchange fixed-rate payments for floating-rate payments. Some swap structures also involve the exchange of two different types of floating-rate payments (floating-floating swaps).

The key users of interest rate swaps are arbitrageurs, borrowers, investors, dealers, hedgers, and speculators.

• Arbitrageurs: market participants with comparative advantage can create not only synthetic loans with lower interest rates than normal loans, but also synthetic investments with rates higher than those from direct investments.
• Borrowers: they seek to lock in costs in expectation of increasing rates and also to unlock their costs in anticipation of decreasing rates. A borrower with a fixed-rate loan who feels that interest rates have hit maximum level might choose to unlock his fixed rate and let the interest expense drop down. Swaps can also be used to lock in current rates in anticipation of future borrowing needs.
• Investors: those who feel that interest rates have peaked can lock in fixed rates and sit watching rates fall.
• Hedgers: they avail interest rate swaps in their efforts to manage their risks.
• Dealers: swap dealers use the swap market to take positions on the future direction of interest rates and/ or swap spreads based on their own market expectations.
• Speculators: the swap market is also used to speculate on the future direction of interest rates and/ or swap spreads based on their own judgment.