chapter 4

by negar R.

Commodity swap

• Commodity swaps are in essence a series of forward contracts on a commodity with different maturity dates and the same delivery prices.

• A swap is an over-the-counter agreement between two companies to exchange cash flows in the future.

• The agreement defines the dates when the cash flows are to be paid and the way in which they are to be calculated.

• Usually the calculation of the cash flows involves the future value of an interest rate, an exchange rate, or other market variable.

• A forward contract can be viewed as a simple example of a swap.

• Whereas a forward contract is equivalent to the exchange of cash flows on just one

future date, swaps typically lead to cash flow exchanges on several future dates.

Hull, 2012, p.148 Levent Yilmaz, Konstantin Lenz, Thomas Siegl 74

4.2 Commodity Swaps

• Swap Transaction: Agreement today to buy/sell commodity at a predetermined fixed price over a predetermined period of time. (often financial)

• A commodity swap is a type of swap agreement whereby a floating (or market or spot) price based on an underlying commodity is traded for a fixed price over a specified period.

• A commodity swap is similar to a Fixed-Floating Interest rate swap.

• A commodity swap is usually used to hedge against the price of a commodity

• Swaps are arguably the most popular - because swaps can be customized while futures contracts cannot - hedging instrument used by oil and gas producers to hedge their exposure to volatile oil and gas prices as hedging with swaps allows them to lock in or fix the price they receive for their oil and gas production.


negar R.


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