Commodity Swap

A commodity swap is a financial contract in which two parties agree to exchange cash flows based on the price of a specific commodity. One party typically agrees to pay a fixed price for the commodity, while the other pays a floating price, which fluctuates based on market conditions. Commodity swaps are commonly used by companies to hedge against price volatility in commodities such as oil, natural gas, or agricultural products.

Example

An airline might enter into a commodity swap agreement to pay a fixed price for jet fuel, while the counterparty pays the floating market price. This helps the airline hedge against rising fuel costs.

Key points

• A commodity swap is a contract where parties exchange cash flows based on the price of a specific commodity.

• One party pays a fixed price, and the other pays a floating price based on market conditions.

• Commodity swaps are used to hedge against price volatility in commodities like oil or natural gas.

Quick Answers to Curious Questions

What is the purpose of a commodity swap?

The purpose is to hedge against price fluctuations in commodities by locking in a fixed price or receiving a floating price based on market conditions.

Which industries commonly use commodity swaps?

Industries like energy, manufacturing, and transportation frequently use commodity swaps to manage the risk of fluctuating prices for raw materials.

How does a commodity swap work?

One party agrees to pay a fixed price for a commodity, while the other party pays the floating market price, with cash flows exchanged based on the difference.