What defines asset swaps in financial terms?

Asset swaps are defined as financial transactions where cash flow streams are exchanged between two parties, typically involving fixed and floating interest rates linked to a certain underlying security, most commonly a bond. In the context of asset swaps, one party holds a fixed-rate bond, and in return, they receive floating interest rate payments, or vice versa. This mechanism allows investors to manage interest rate risks or to achieve better liquidity by switching between different types of cash flow profiles.

By focusing on the exchange that usually involves a bond (which is often the underlying asset in these arrangements), it emphasizes the fundamental nature of asset swaps as a tool for interest rate management. This exchange allows an investor to benefit from changes in market conditions, making it a strategic financial instrument for portfolio management.

The other options describe different financial instruments or strategies but do not accurately encompass the complete nature of what an asset swap entails.