Price Swap Derivative

What is a ‘Price swap derivative’

The price of derivative swap derivative transactions where one organization guarantees a fixed value for all the assets of another business entity for a certain period. Under this type of agreement when the value of the encumbered asset is diminishing, the Contractor is obliged to deliver shares or other collateral to offset losses and bringing the asset to its original value.

Breaking down the ‘exchange Price derivatives’

Price derivative financial instruments the swap to include the value of the assets of one company remain constant within the prescribed period, by the distribution of shares in another company. In this sense, the price of the derivative swap can effectively hide the fact that the financial situation of the company-recipient is weakening over time. However, if the Contractor issues the new shares to fill the gap created by the decline in assets, this leads to a dilution of value for existing shareholders. It is a combination of misleading evaluation on the one hand and increasingly diluted shares on the other could lead to the destabilization of the financial situation of both parties in the contract.

Today, the price of the derivatives, the swap is relatively unusual transactions. Their rarity due to changes in accounting rules and more common ways to hedge against the fall in the value of assets.

In a more General form of derivative known as a futures contract, one party undertakes to sell to another party at a specified price on a specified date in the future. Options are derivatives similar to futures, with the main difference that the buyer is not obliged to acquire the assets when the future date arrives.

An example of a swap price derived

Price derivatives swap was done by the famous financial scandal with Enron. Enron used price swap derivatives to ensure the value of one of its subsidiaries, of a limited liability partnership name Raptor. Under the derivative transaction when the assets of Raptor fell below $1.2 billion, Enron promised to give an adequate supply for auxiliary make up the difference and preserve the assets of the Raptor for permanent.

As it has repeatedly occurred over time, the shares of enron are an increasing part of the total assets of a predator. This practice only increased the need to start the transaction, because every time Enron stock fell, but also will contribute the assets of the Raptor below the threshold of 1.2$. This downward spiral continues force Enron to issue additional shares of the subsidiary. While the acceleration of transactions with derivative financial instruments diluted the stock value for shareholders of Enron, they also prevent the company from having to record the decline in the value of the subsidiary. The result helped to inflate its bottom line on a regular financial statements.

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