Credit default swap. A CDS provides insurance from the default of a debt instrument. The buyer of a swap transfers to the seller the premium payments. In case the asset defaults, the seller will reimburse the buyer the face value of the defaulted asset, while the asset will be transferred from the buyer to the seller. What Is a Plain Vanilla Swap? A plain vanilla swap is one of the simplest financial instruments contracted in the over- the-counter market between two private parties, both of which are usually firms or financial institutions. There are several types of plain vanilla swaps, including an interest rate swap, commodity swap, and a foreign currency swap. The term plain vanilla swap is most commonly used to describe an interest rate swap in which a floating interest rate is exchanged for a fixed rate or vice versa. Interest Rate Swap An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap. Currency Swap
