Definitions for "Basis Swap"
An interest rate swap in which two streams of floating rate payments are exchanged. For example, two counterparties may exchange 1 month LIBOR for 3 month LIBOR payments.
A floating-for-floating interest rate swap that pairs 2 floating rate instruments at different maturities (such as 6-month LIBOR versus 30-day U.S. T-bills).
basis swaps are used to hedge exposure to basis risk, such as locational risk or time exposure risk. For example, a natural gas basis swap could be used to hedge a locational price risk: the seller receives from the buyer a Nymex division settlement value (usually the average of the last three daysâ€(tm) closing prices) plus a negotiated fixed basis, and pays the buyer the published index value of gas sold at a specified location.