An interest rate swap is a derivative instrument that allows flexibility in the management of interest rate risk by clients. Under this the bank swaps the floating rate interest liability of a customer for a fixed rate liability or vice versa. This is particularly relevant in managing of borrowing costs where a client takes long term borrowing in currencies with volatile interest rates. Irrespective of whether the loan is contracted on fixed or floating rate basis, the client can switch over to the opposite mode by entering into an IRS contract any time later. IRS may of course also be used to protect the yield on assets that are earning interest.

IRS is available in most major currencies for amounts starting from BD 1 million. While the greatest depth of this market is in tenors up to 3 years it is possible to price swaps up to 5 years.