Finally, swaps live up to their name. A swap can occur when two parties agree to
exchange one stream of cash flows against another one. Swaps can be used to hedge risks
such as changes in interest rates, or to speculate on the changing prices of commodities
or currencies. Swaps can be difficult to understand, so here is an example. JP Morgan
developed CDSs that bundled together as many as 300 different assets, including subprime
loans. Credit default swaps were meant as a form of insurance. In other words, securities
were bundled into one financial package, and companies such as JP Morgan were essentially
paying insurance premiums to the investors who purchased them, who were now on the
hook if payments of any of the securities included in the CDSs did not come through.