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Mastering the Commodities Markets by Francesca Taylor

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HEDGING AND TRADING INSTRUMENTS

OTC swaps

A gold swap is a spot sale or purchase of metal with a simultaneous purchase or sale of metal at a specified date in the future. The interest cost associated with this method of financing is reflected in the forward price. The swap rate is derived from US$ LIBOR minus the gold lease rate:

The gold lease rate = $ LIBOR minus the gold swap rate

Assume three-month $ LIBOR = 2.5 per cent p.a. and the three-month gold versus $ swap rate is 1 per cent p.a., then the three-month gold lease rate is 1.5 per cent p.a. Therefore the prime gold lending rate for three months is 1.5 per cent p.a. and clients borrowing gold from a bullion bank would pay this ‘gold LIBOR’ plus a credit spread.

Swaps are the most common ...

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