Price Swap Derivative

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DEFINITION of 'Price Swap Derivative'

A derivative transaction in which one party guarantees a fixed value for the total asset holdings of an entity over a certain period of time. Under a price swap derivative, if the value of the guaranteed assets declines, the counterparty is obligated to deliver stock or other collateral in order to offset any losses.

INVESTOPEDIA EXPLAINS 'Price Swap Derivative'

The price swap derivative was made famous through its use by Enron to guarantee the value of certain "special purpose entities." When the value of the assets held in these special purpose entities declined, these derivatives required the issuance of increasing amounts of Enron shares, resulting in substantial dilution for existing shareholders. Price swap derivatives remain relatively uncommon transactions, due to changes in accounting rules and the availability of more common methods to insure against declines in asset values.

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