What is reciprocal buying?  



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Reciprocal buying is just two businesses entering into an agreement to buy each others' goods.

Think of a large company with lots of business lines, like Johnson and Johnson. They have hundreds of suppliers and customers. Let's say the have a shampoo manufacturer who owns the factory where they make J&J's shampoo. The owner of the factory sells the shampoo to J&J who sells it to a retailer. But the factory own also has to stock the first aid kits on his factory floor with bandages. J&J sells him the bandages. Codifying this in a contract would create a reciprocal buying arrangement. J&J buys x amount of shampoo in exchange for the factory owner buying x bandages for his first aid kits.

This is example is clearly contrived, but illustrates the points. A common, more abstract example would be banks executing credit swaps, agreeing to reciprocally buy fixed-rate credit for floating-rate credit. It's the same basic principle: an agreement for two counterparties to buy one anothers' goods.

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