Rate Anticipation Swap

Swaps work by having two parties trade the income generated by interest rate-bearing investments. You have a 6% fixed rate investment, but trade the cash generated by that holding for the proceeds of a 5.5% floating-rate investment. The other party gets the sure return of the fixed rate. You get to gamble a little on the floating rate, hoping it will go up.

The rate anticipation swap adds a wrinkle. The transaction involves the extra fun of guessing rate changes in the future. The details of the swap contract take into account a prediction of where interest rates will move during the period of time the swap exists.

These projections are necessarily guesses. The investors are betting that a set of circumstances will occur. The participants in the swap have a particular view of what will happen with rates and are trying to profit on that prediction.