What is a 'swap' in financial terms?

A swap is fundamentally a derivative contract wherein two parties enter into an agreement to exchange financial obligations. This financial instrument is typically used to manage risk or to take advantage of differing interest rates, currency values, or other financial elements.

In a typical interest rate swap, for example, one party might agree to pay a fixed interest rate while receiving a floating rate based on an underlying reference rate, such as LIBOR. This exchange allows both parties to align their financial obligations with their risk management strategies or investment goals.

Swaps can also come in various forms, including interest rate swaps, currency swaps, and commodity swaps, each designed to provide distinct benefits based on the needs of the involved parties.

The other options describe different financial instruments or strategies that do not accurately capture the essence of what a swap is. Equity securities represent ownership in a company, bulk purchasing methods refer typically to procurement strategies, and investment strategies often incorporate various approaches to managing risk and return across multiple assets but do not inherently involve the direct exchange of financial agreements like swaps do.