Basis swap

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Interest rate swaps.

A basis swap is 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.


Basis swaps are sometimes known as floating/floating swaps, because one floating rate is exchanged for another.


See also