A commodity swap is a transaction in which one party pays, on a one-time basis or in instalments, a predetermined fixed price and receives a predetermined floating price (e.g. an average of prices in a given month) for the agreed commodity volume. On the date of settlement, only the difference between the two prices (floating and fixed) multiplied by the agreed volume of the commodity is settled, and not the notional amounts.
This product serves to hedge the risks out of the given commodity price fluctuations. Only the difference between the prices, and not the notional amounts, are paid out. A commodity swap is only offered to hedge the risks resulting out of, and connected with, a client’s commercial activities.
The volume of the commodity can either be constant or variable depending on the client’s requirements.