Interest rate swap (IRS) is a swap of various interest rates in the same currency. Its purpose is to hedge against an increase (decrease) in interest rates. Based on an IRS contract, the buyer and seller take on an obligation to swap interest payments. During a fixed period set in advance two cash- flows are swapped with the other party. One cash- flow represents the loan and the other the investment - the two groups of interest payments of the swap. One group of interest payments is bound to a fixed rate and the other to a floating reference rate.
The buying party pays interest corresponding to a fixed agreed interest rate, usually once a year. The selling party pays the interest, the amount of which depends on the floating reference rate. The buyer thus hedges against an increase in interest rates, the seller against a decrease.
The minimum amount for an IRS transaction is CZK 50 mil. or EUR or USD 1 mil. The duration of an IRS can be from 1 up to 15 years.