Basis swap

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A swap that exchanges two floating interest rates, each being calculated on a different basis. For example, 3-month LIBOR against 6-month LIBOR, or LIBOR against Prime.

The use of a basis swap for hedging is to transform a borrowing or deposit with interest calculated on a particular basis, into a synthetic liability or asset with interest effectively calculated on an alternative basis. This alternative interest basis being considered preferable by the hedger.

See also