A derivative contract between two parties that involves the exchange of pre-agreed cash flows
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A swap is a derivative contract between two parties that involves the exchange of pre-agreed cash flows of two financial instruments. The cash flows are usually determined using the notional principal amount (a predetermined nominal value). Each stream of the cash flows is called a “leg.”
Introduced in the late 1980s, swaps are a relatively new type of derivative. Even though relatively new, their simplicity, coupled with their extensive applications, makes them one of the most frequently traded financial contracts.
Corporate finance professionals may use swap contracts to hedge risk and minimize the uncertainty of certain operations. For example, sometimes projects can be exposed to exchange rate risk and the Company’s CFO may use a currency swap contract as a hedging instrument.
Unlike futures and options, swaps are not traded on exchanges but over-the-counter. In addition, counterparties in swaps are usually companies and financial organizations and not individuals, because there is always a high risk of counterparty default in swap contracts.
Some financial institutions usually participate as the market makers of swap markets. The institutions, which are also known as swap banks, facilitate the transactions by matching counterparties.
Types of Swaps
Modern financial markets employ a wide selection of such derivatives, suitable for different purposes. The most popular types include:
Counterparties agree to exchange one stream of future interest payments for another, based on a predetermined notional principal amount. Generally, interest rate swaps involve the exchange of a fixed interest rate for a floating interest rate.
Counterparties exchange the principal amount and interest payments denominated in different currencies. These contracts swaps are often used to hedge another investment position against currency exchange rate fluctuations.
These derivatives are designed to exchange floating cash flows that are based on a commodity’s spot price for fixed cash flows determined by a pre-agreed price of a commodity. Despite its name, commodity swaps do not involve the exchange of the actual commodity.
A CDS provides insurance from the default of a debt instrument. The buyer of a swap transfers to the seller the premium payments. In case the asset defaults, the seller will reimburse the buyer the face value of the defaulted asset, while the asset will be transferred from the buyer to the seller. Credit default swaps became somewhat notorious due to their impact on the 2008 Global Financial Crisis.
Applications of Swaps
Nowadays, swaps are an essential part of modern finance. They can be used in the following ways:
#1 Risk hedging
One of the primary functions of swaps is the hedging of risks. For example, interest rate swaps can hedge against interest rate fluctuations, and currency swaps are used to hedge against currency exchange rate fluctuations.
#2 Access to new markets
Companies can use swaps as a tool for accessing previously unavailable markets. For example, a US company can opt to enter into a currency swap with a British company to access the more attractive dollar-to-pound exchange rate, because the UK-based firm can borrow domestically at a lower rate.
Related Readings
Thank you for reading CFI’s guide on Swap. To continue learning and advancing your financial career, these additional resources will be helpful:
If the swap space is full, the system starts swapping out active memory, leading to performance degradation and even system crashes. Information loss. If the system loses power during intensive swapping, the swap file is not flushed to disk, resulting in data loss.
Swap space should be twice the size of RAM in case the RAM amount is below 2 GB. If RAM amounts to more than 2 GB, then swap space should be the size of RAM + 2 GB. For example, 6GB of swap for 4GB of RAM.
If RAM is less than 1 GB, swap size should be at least the size of RAM and at most double the size of RAM. If RAM is more than 1 GB, swap size should be at least equal to the square root of the RAM size and at most double the size of RAM.
While swap space is essential for these reasons, the amount you need depends on your system's RAM and how you use it. In some cases, systems with ample RAM may hardly use swap space at all, while systems with limited RAM or specific workloads may make more frequent use of it.
To clear the swap memory on your system, you simply need to cycle off the swap. This moves all data from swap memory back into RAM. It also means that you need to be sure you have the RAM to support this operation. An easy way to do this is to run 'free -m' to see what is being used in swap and in RAM.
If your system runs out of swap file space and is unable to allocate additional virtual memory, it can lead to crashes or freezing of programs. When the operating system is unable to swap data between the random-access memory (RAM) and swap file, it has no place to store the excess data.
Generally, any amount is "safe". The concern is what sort of hit you take on performance by using swap and with SSDs, high amounts of swap could mean additional wear and tear on the SSD to the amount of writes.
In swinging, you have the hard swap (or full swap) and the soft swap. A hard swap includes all sorts of sexual activities, including intercourse. But a soft swap stops short of penetration, usually including manual stimulation, flirting, caressing, kissing and potentially oral sex.
SWaP stands for Size, Weight, and Power – it is typically used in the context of reducing the overall dimensions and weight of a device while increasing its efficiency and lowering the overall footprint.
It may be positioned anywhere on the disk (but see notes on placement). Either a primary or logical partition can be used for swap. More than one swap partition can exist on a drive.
How you can view the amount of swap space on your Linux system? You can use the swapon –show command to view the swap space on your system. Another useful command is the free command that displays both swap space and memory usage. With -m, the results are displayed in MBs instead of KBs.
A swap is an agreement or a derivative contract between two parties for a financial exchange so that they can exchange cash flows or liabilities. Through a swap, one party promises to make a series of payments in exchange for receiving another set of payments from the second party.
Swap is used to give processes room, even when the physical RAM of the system is already used up. In a normal system configuration, when a system faces memory pressure, swap is used, and later when the memory pressure disappears and the system returns to normal operation, swap is no longer used.
Saving a swap file does not more harm that saving any other file. It will not hurt your SSD drive. If it did not create the swap file, the alternative is that Windows would run out of memory, it would crash and end up losing everything in the computer. Having a swap file when needed is a good thing.
When swapoff disables a swap device (or file), the data that's stored there is read back into memory. If there isn't enough available memory to do so (perhaps by swapping out to another swap device, if any are still available), swapoff fails with exit status 2.
Excessive swapping can cause disk I/O bottlenecks, leading to poor overall system performance. The system may become unresponsive or crash if the swap space is not sufficient to handle the amount of data being moved from physical memory.
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