448 Planning and Forecasting size and direction of the cash f lows are determined by an agreed upon formula spelled out in the swap agreement—a formula that is contingent on the performance of other underlying instruments. Due to this contingency on other underlying assets, swaps are considered derivatives. One easy type of swap to understand is the equity swap. Suppose Back Bay Investment Management owns a large block of Standard & Poor’s 500 stocks. Suppose another firm, Capital Bank owns a large block of NASDAQ stocks. Back Bay would like to diversify into NASDAQ stocks, and simultaneously Capital Bank would like.
