Interest rate swaps are commonly used for hedging against interest rate risk. In an interest rate swap, one party pays a fixed interest rate while receiving a floating interest rate (often linked to a benchmark such as LIBOR), while the other party does the opposite. This transaction is usually conducted through an intermediary, and the parties settle the difference in interest payments periodically, rather than exchanging principal amounts. These swaps can help entities manage their interest rate exposure, optimize their borrowing costs, and align their cash flow obligations with their financial strategies.