Explanation:

A contract to exchange two financial liabilities. For example, swapping fixed interest-rate debts for variable-rate debts. They are commonly used to enable a borrower to change the basis of interest payments and will often incur a fee.

• A company may issue bonds with a variable interest rate. They may then protect against the risk of a rate drop by undertaking a swap transaction to offset the cost of any potential decline in interest. They will typically pay a set percentage fee as part of the agreement.

• In foreign exchange swaps, there are two legs – a spot transaction and a forward transaction. Both are executed at the same time for the same quantity, and therefore offset. They occur if both companies have a currency that the other requires.

• Other common swap transactions include currency swaps, debt swaps and commodity swaps.

Hence option 1st is correct.