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Swaps are the most widely used price risk
management tool for a variety of reasons, the
most common being, no upfront transaction cost.
Swaps give companies the ability to effectively
switch from one price structure to another - from
floating price to fixed or vice versa. They are used
most often to fix, or lock in, prices and margins
between prices. In exchange for price protection,
the ability to capitalize on some beneficial price
movements is sacrificed.
The typical swap transaction involves the
exchange of a fixed price for a variable price tied
to an acceptable market index. Settlement is
financial - i.e., cash changes hands; physical
product does not. Each month during the life of
the transaction, the difference between the two
prices is calculated and payment is made to the
appropriate party.
Swaps for producers
Swaps for consumers
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