A spread agreement, also known as a differential swap or a basis swap, is a financial contract between two parties to exchange the difference between two interest rates or other financial indicators. It is a type of derivative contract that allows the parties to hedge against or profit from changes in the market conditions.

To understand spread agreement, let`s first take a look at the basic concept of a swap. A swap is a financial contract between two parties to exchange cash flows based on specific terms and conditions. It can be used to hedge against risks or to profit from market movements. In a typical swap, one party agrees to pay a fixed rate while the other party agrees to pay a variable rate based on an underlying financial indicator, such as an interest rate or a commodity price.

In a spread agreement, the parties agree to exchange the difference between two interest rates or other financial indicators. For example, one party may agree to pay the London Interbank Offered Rate (LIBOR) plus a fixed spread, while the other party agrees to pay the US Treasury rate plus a variable spread. The spread is the difference between the two rates, and it can be positive or negative depending on the market conditions.

Spread agreements are commonly used in the financial industry to manage interest rate risk, credit risk, and other market risks. They allow the parties to customize their exposure to specific market conditions and to hedge against potential losses or to lock in profits.

There are different types of spread agreements, including constant maturity swaps, floating-to-fixed swaps, and fixed-to-floating swaps. Each type has its own specific terms and conditions, and the parties must carefully evaluate the risks and benefits before entering into the contract.

In summary, a spread agreement is a financial contract between two parties to exchange the difference between two interest rates or other financial indicators. It is a type of derivative contract that allows the parties to manage their exposure to specific market conditions and to hedge against potential losses or to lock in profits. As with any financial contract, it is important to carefully evaluate the risks and benefits before entering into a spread agreement.