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Finally, we note that swaps can be equated to combinations of options. Buying a call and selling a put would force the transacting party to make a net payment if the underlying is below the exercise rate at expiration, and would result in receipt of a payment if the underlying is above the exercise rate at expiration. This payment will be equivalent to a swap payment if the exercise rate is set at the fixed rate on the swap. Therefore, a swap is equivalent to a combination of options with expirations at the swap payment dates. The connection between swaps and options is relatively straightforward for interest rate instruments, but less so for currency and equity instruments. Nonetheless, we can generally consider swaps as equivalent to combinations of options.
In this series of posts, we have learned that swaps can be shown to be equivalent to combinations of assets, combinations of forward contracts, combinations of futures contracts, and combinations of options. Thus, to price and value swaps we can choose any of these approaches. We choose the simplest: swaps and assets.

It is a fairly common practice to equate swaps to futures contracts. This practice is partially correct, but only to the extent that futures contracts can be equated to forward contracts. Futures contracts are equivalent to forward contracts only when future interest rates are known. Obviously this condition can never truly be met, and because swaps are often used to manage uncertain interest rates, the equivalence of futures with swaps is not always appropriate. Moreover, swaps are highly customized contracts, whereas futures are standardized with respect to expiration and the underlying instrument. Although it is common to equate a swap with a series of futures contracts, this equality holds true only in very limited cases.

Recall that a forward contract, whether on an interest rate, a currency, or an equity, is an agreement for one party to make a fixed payment to the other, while the latter party makes a variable payment to the former. A swap extends this notion by combining a series of forward contracts into a single transaction. There are, however, some subtle differences between swaps and forward contracts. For example, swaps are a series of equal fixed payments, whereas the component contracts of a series of forward contracts would almost
always be priced at different fixed rates.I4 In this context we often refer to a swap as a series of off-market forward contracts, reflecting the fact that the implicit forward contracts that make up the swap are all priced at the swap fixed rate and not at the rate at which they would normally be priced in the market. In addition, in interest rate swaps, the next payment that each party makes is known. That would obviously not be the case for a single forward contract. Other subtleties distinguish currency swaps from a series of currency forwards and equity swaps from a series of equity forwards, but in general, it is acceptable to view a swap as a series of forward contracts.