A basis swap involves swapping one floating rate index for another. An interest rate swap in which payments are on a different floating-rate basis, e.g., three-month versus six-month. Also known as a floating/floating swap. A basis swap enables the user to lock in a differential between two grades, two product types, or two locations of a commodity. This tool is used to fine-tune energy price risk management. (A swap on the differential between a petroleum product and crude oil is often referred to as a “crack spread” swap.)
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