Commodity swap: Difference between revisions
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A '''commodity swap''' is an agreement where by a floating (or market or spot) price based on an underlying commodity is exchanged for a fixed price over a specified period. |
A '''commodity swap''' is an agreement where by a floating (or market or spot) price based on an underlying commodity is exchanged for a fixed price over a specified period. |
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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 like 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. |
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 like 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. |
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Revision as of 00:40, 11 December 2011
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This article provides insufficient context for those unfamiliar with the subject.(February 2008) |
A commodity swap is an agreement where by a floating (or market or spot) price based on an underlying commodity is exchanged for a fixed price over a specified period.
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 like 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.