A swap is an agreement between two parties which entails the exchange of two different streams of cashflows over a specific period of time. The cashflows may be based on interest rates, equity returns, index values, commodity returns, exchange rates, etc. In many cases, no actual exchange takes place between the parties, as the party with net profit receives from the party with net loss the net value of the swap on specific fixing dates and the notional amount of the swap is merely used as a basis for calculation.

There are some types of swaps that are embedded with options conferring on a party the right to terminate the contract according to specific terms and conditions. From a shari’a point of view are not permitted in this particular meaning as they are associated with elements of prohibition such as riba, gharar, jahalah, etc. Currency swaps constitute deferred transactions in currencies, and their sale lacks possession by the two parties.

In general, derivatives, including swaps, represent binding promises that are converted to real transactions pertaining to the future, while the parties exchange no offer and acceptance.