Backwardation Swap

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Backwardation Swap

A swap in which two parties exchange cash flows based on the current price and the future price of a commodity. That is, the two legs are the current price of a commodity and the expected price at some point in the future. This is used by commodity investors to hedge against future price fluctuations. For example, a farmer may use a backwardation swap to secure a certain price for his wheat before it is grown. See also: Futures Contract.