An interest rate swap is a financial derivative contract between two parties, in which

they agree to exchange interest rate cash flows based on a notional amount of
principal.

In an interest rate swap, one party agrees to pay a fixed interest rate on the notional
principal amount, while the other party agrees to pay a floating (variable) interest rate on
the same notional amount. The floating interest rate is typically tied to a benchmark rate
such as the LIBOR, and is reset periodically based on the prevailing market rate.

The purpose of an interest rate swap is to allow both parties to manage their interest
rate exposure and obtain financing at the lowest possible cost. For example, a company
with a variable-rate loan may want to convert the loan to a fixed rate to protect against
interest rate increases. Conversely, a company with a fixed-rate loan may want to
convert the loan to a floating rate to take advantage of potential interest rate decreases.

Interest rate swaps are typically traded over-the-counter (OTC) between banks and large
financial institutions. The terms of the swap, such as the notional amount, the fixed and
floating interest rates, and the swap's maturity, are negotiated between the parties
involved. The terms of the swap are generally customized to meet the specific needs of
the parties involved.