• An asset swap is used to convert cash flow characteristics in order to hedge risks from one financial instrument with undesirable cash flow characteristics to another with favorable cash flow characteristics.

  • There are two parties involved in an asset swap: the protection seller, who receives cash flows from the bond, and the swap buyer, who hedges the risk associated with the bond by selling it to the protection seller.
  • The seller pays the asset swap spread, which is equal to the overnight rate plus (or minus) the pre-calculated spread.