Basis Swap
A basis swap is a type of interest-rate swap in which two parties exchange floating-rate payments based on different reference rates or tenors, with no principal exchanged. Examples include swapping payments tied to SOFR (Secured Overnight Financing Rate) and LIBOR (London Interbank Offered Rate).
Example: Two financial institutions enter a basis swap with a notional of $100 million, where Party A pays 3-month SOFR and Party B pays 3-month LIBOR; no principal is exchanged and payments are netted.
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