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A contract between two parties in which the parties: (a) promise to make payments to one another on scheduled dates in the future, and (b) use different criteria or formulas to determine their respective payments. Swaps are not guaranteed by any clearinghouse, and, therefore, are susceptible to default. Because of this, the contracting parties are sometimes required to post collateral or mark to market. Corporations and financial institutions are the primary users of swaps.

Swaps are equivalent to a series of forward contracts, each with the same price. However, the structure of a swap can be far more efficient than a package of individual contracts.

There are four classes of swaps defined by the type of their underlying instrument: interest rate, equity, currency, and commodity.

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 In simple words Dictionary meaning of SWAP is exchange/barter/substitution.  Thus SWAP contract is a contract in which two parties agree to exchange something.  This "something" will become the nature of SWAP contract.  In field of finance Swap contracts are basically used as a hedging tool.  These are covered under Derivatives.  The various classes of swap contracts can be interest rate Swap, equity swap, currency swap, and commodity swap. For Exp -  In Interest Rate swap, two parties will contract to exchange their interest rates.  One party receives fixed interest rate and pays floating interest rate and other party does the reverse. Similarly in Currency Swap, Currency + Interest can be exchanged between the parties. You can get technical definitions, procedures and working of swap instruments from google and also from SFM in CA final.

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