The Importance Of Entering Into Agricultural Swap

1740 WordsMay 17, 20167 Pages
1. Swap is defined as an agreement or contract between counterparties for the purpose to manage their exposure to risk. Our paper will specifically discuss about one of the commodity derivatives called as Agricultural Swap and referring to the the Agriculture Swap Contract Product (ASC) Disclosure Statement issued by Westpac Banking Corporation dated in 10 February 2016. The main purpose of entering into Agricultural Swap is to manage the exposure of the agriculture price’s movement by locking the price of the agriculture for a long period (Barned 2012). Agriculture seller or buyer is entitled to exchange a floating price for a fixed price for a specified commodity (Westpac Banking Corporation 2016). Swaps have characteristics that similar and also differentiate them from other derivatives instruments (McDonald 2006), which are as follow: • Swaps are categorized as non-standardized contract; therefore they are traded over the counter (OTC). It is also indicate that there is a room of privacy and flexibility to customize the contract depending on the agreement between the relevant parties involved in the swap. • Similar with the others derivatives instruments, swaps have also a zero initial market value. This implies that parties may enter and exit the swap contract without any cost besides the commissions and bid ask spread. • In commodity swaps, settlement could be arranged with either physical (e.g. commodities) or financial (cash settlement). • There are several

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