Basis Swap

A Basis Swap is an interest rate swap where both legs of the exchange are based on floating interest rates, but tied to different underlying benchmarks, such as exchanging payments based on the Secured Overnight Financing Rate (SOFR) for payments based on the Euro Interbank Offered Rate (EURIBOR), or two different tenors of the same benchmark, such as 3-month LIBOR for 6-month LIBOR. The primary function of a basis swap is to manage the risk associated with the spread, or "basis," between these two floating rates, which is crucial for financial institutions and corporations managing complex funding and asset portfolios.