What is Swap and Its Limitations

Swap can be defined as agreement between two parties to exchange a series of payment, the terms of which are predetermined is called swap. In simple terms when one party agree to exchange its financial instrument with other parties financial instrument is called swap. However there are certain limitations of using swap and here are some of them –

1. It is difficult to identify a counter-party to take the opposite side of the transaction. So suppose one company wants to swap $100000 it is not necessary that other company will also be willing to swap the same amount with same maturity and hence it is a shortcoming of swap market.

2. The swap deal cannot be terminated without the mutual agreement of the parties involved in the transactions, also it has significant amount of default risk in it and hence it is risky instrument to use.

3. Secondary market for swap is still not fully developed like that of equity or currency market and hence swaps are illiquid and cannot be easily traded like equities or currencies.

4. Since swap market is an over the counter market and not exchange controlled the parties have to look carefully into the creditworthiness of the counter-party because there is no exchange to guarantee about fulfilling of the obligations of the parties involved in swap.

Hence from the above one can see that swap has some limitations and that’s the reason why only big financial institutions and companies do swaps.

0 comments… add one

Leave a Comment

Related pages

define cost push inflationmerits and demerits of atmwhat is skimming pricing in marketingwhat are the advantages of a command economyhorizontal mergers examplesadvantages and disadvantages of advertisement on televisiondisadvantages of mergers and takeoversgoodwill journal entrypricing strategies skimmingessay on advantages and disadvantages of competitionmerits and demerits of socialist economyadvantages of merger and acquisition pdflifo method advantages and disadvantagesplanned economy advantages and disadvantagesdurable consumer goods definitionpenetration pricing examplecost oriented pricing strategybill discounting meaningdifferentiate between fixed cost and variable costdifference between mixed economy and capitalismadvantages and disadvantages of using a debit carddrawee drawerdrawbacks of online bankingwhat does cross cheque meansexamples of price elastic goodsunearned revenue in balance sheetfeatures of derivative marketwhy does the government intervene in a mixed economyadvantages of functional organisational structuredefinition of barter systemmeaning of crossing of chequewhat is crossing chequewhat are some examples of durable and nondurable goodshorizontal analysis of financial statementcurrent liabilities examples balance sheetgoodwill journal entryadvantages and disadvantages of investment appraisalthe difference between accounts payable and accounts receivabledifference between overdraft and term loansupplementary goods economicswhat are some characteristics of a traditional economyregional rural banks meaningdisadvantages of globalizationmutual funds advantages disadvantagesunbilled revenue accountingwhat is a derivative marketventure capital disadvantagesmixed economy tagalogdefinition of chequesadvantages and disadvantages of international monetary systembackward integration strategy examplesbartering systemconsignor definitionassumption of diminishing marginal utilitydefine consignee and consignorconsignor definitionkyc abbreviationcharacteristics of a traditional economydisadvantages of monopolistic competition market structuremortgage and hypothecationadjusting entry unearned revenueaccounting and economic profitmeaning of consignor and consigneemerits and demerits of debit cardcreditors turnover ratioadvantages and disadvantages of perfect competitiondeflation economics helpunearned revenue on a balance sheetadvantages and disadvantages of decentralisationdescribe a traditional economydifference between socialism and capitalism