Asked by Gavin VandenTop on Jun 01, 2024
Verified
Explain the difference between a swap contract and a forward contract. Give an example of a firm which is likely to benefit from a swap contract.
Swap Contract
An agreement between two parties to exchange sequences of cash flows for a set period of time according to predetermined terms.
Forward Contract
An agreement customized for two individuals to either buy or sell a particular asset at a price decided upon for a future date.
- Understand the distinctions among different types of financial agreements such as forwards, futures, options, and swaps, along with their distinctive features.
- Investigate the principle of cross hedging and its utilization in mitigating risk, along with the constraints it entails.
Verified Answer
AR
Alyssa RobertsJun 03, 2024
Final Answer :
A swap contract is a series of forward contracts combined into a single contract. Any firm which would buy, or sell, forward contracts on the same underlying asset at regular intervals would probably benefit by a swap contract. For example, Hershey's has an ongoing need to obtain cocoa and Kellogg's has an ongoing need for wheat and corn. Student answers will vary but each answer should express a repetitive and routine demand for, or supply of, a particular commodity, currency, or interest rate.
Learning Objectives
- Understand the distinctions among different types of financial agreements such as forwards, futures, options, and swaps, along with their distinctive features.
- Investigate the principle of cross hedging and its utilization in mitigating risk, along with the constraints it entails.