An Interest Rate Swap (IRS) is a derivative contract between two parties to exchange cash flows based on interest rate obligations. Commonly, one party pays a fixed interest rate and receives a floating interest rate, often tied to a benchmark such as LIBOR, SOFR, or EURIBOR, while the other party does the opposite.

Interest Rate Swaps are frequently used for managing interest rate risk or speculating on interest rate movements. For instance, if a company has a loan with a floating interest rate and expects interest rates to rise, it may enter into an IRS to pay a fixed interest rate instead. This mitigates the risk of rising interest expenses.

As an example, consider a company that borrows $5 million at an interest rate tied to LIBOR + 2%. They enter into an IRS to pay 3% fixed and receive LIBOR, effectively locking in their interest costs at 3% + 2%. This swap arrangement offers predictability in financial planning and expense management.

IRSes are vital in financial markets and corporate balance sheet management. However, they're complex instruments requiring careful valuation and understanding of the underlying risks involved.