Airbag Swap

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Airbag Swap

An interest rate swap with a notional amount that fluctuates according to changes in prevailing interest rates. Most interest rate swaps have roughly the following structure: the counterparties agree to swap a fixed interest rate and a floating interest rate, both calculated over some notional amount. In an airbag swap, the notional amount may increase as interest rates increase and decrease as they decrease, or vice versa. An airbag swap is most useful when the counterparties wish to hedge investments that are highly sensitive to changes in prevailing interest rates, such as bonds.