Commodity swap

A commodity swap is an agreement whereby a floating (or market or spot) price based on an underlying commodity is traded for a fixed price over a specified period.[1]

A Commodity swap is similar to a Fixed-Floating Interest rate swap. The difference is that in an Interest rate swap the floating leg is based on standard Interest rates such as LIBOR, EURIBOR etc. but in a commodity swap the floating leg is based on the price of underlying commodity like Oil, Sugar etc. No Commodities are exchanged during the trade.

In this swap, the user of a commodity would secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved.

On the other side, a producer wishes to fix his income and would agree to pay the market price to a financial institution, in return for receiving fixed payments for the commodity.

The vast majority of commodity swaps involve oil.

References

  1. ↑ http://chicagofed.org/webpages/publications/understanding_derivatives/index.cfm

External links


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