Macroeconomic Swap
Categories: Econ, Derivatives
First off, a swap happens when two parties decide to swap cash flows (or derived value) of some asset that each owns.
Example:
If you were invested in AAPL and your friend was invested in stock GOOG, then you guys could make a derivative contract and swap the payouts, with your friend getting your AAPL dividends and you getting your friend’s GOOG dividends.
A macroeconomic swap is one where one or both parties’ payout is linked to some macroeconomic factor, like GDP, inflation, an index, or even the unemployment rate.
It’s common for big companies to do macroeconomic swaps as a hedge against risk. Unlike other swaps, macroeconomic swaps allow firms to prepare against specific economic events that they’re worried about.
Are you worried? We’re not worried. Everything is fine.