What characterizes a forward swap?

A forward swap is characterized by payments that begin at a specified future time. This means that the agreement is made in advance, but the actual cash flows do not commence until a later date, allowing the parties involved to hedge against future interest rate movements or manage their financial positions more effectively at that set starting point. This setting provides flexibility and planning options for cash flow management since it aligns the initiation of the swap payments with projected financial needs or market conditions.

In contrast, options suggesting immediate payment exchanges or indefinite payment durations do not align with the fundamental structure of a forward swap, where the focus is placed on future payment schedules rather than current transactions or open-ended commitments. The notion of early termination, while it may apply to various swap agreements, does not specifically define the nature of a forward swap, which is primarily concerned with the delayed start of payments rather than its termination rules.