Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
A) Setting a permanent price at which a commodity will be traded.
B) Setting the price at the minimum spot price during a given period of time.
C) Setting the price equal to the spot price on the delivery date.
D) Using the average market price over a given period of time.
E) Setting the contract price equal to some percentage, less than 100 percent, of the market price on any given day.

Question

Quizplus · Accepted Answer

Using the average market price over a given period of time reduces transactions exposure for both parties in a swap contract by smoothing out price volatility and providing a more predictable and fair pricing mechanism. This method averages out the highs and lows, making the price less susceptible to short-term market fluctuations.

Which One of the Following Methods of Setting Prices Would