Commodity Swap

AAA

DEFINITION of 'Commodity Swap'

A swap in which exchanged cash flows are dependent on the price of an underlying commodity. A commodity swap is usually used to hedge against the price of a commodity.

INVESTOPEDIA EXPLAINS 'Commodity Swap'

The vast majority of commodity swaps involve oil. So, for example, a company that uses a lot of oil might use a commodity swap to secure a maximum price for oil. In return, the company receives payments based on the market price (usually an oil price index).

On the other side, if a producer of oil wishes to fix its income, it would agree to pay the market price to a financial institution in return for receiving fixed payments for the commodity.

RELATED TERMS
  1. Catastrophe Swap

    A customizable financial instrument traded in the over-the-counter ...
  2. Commodity Price Risk

    The threat that a change in the price of a production input will ...
  3. Forward Exchange Contract

    A special type of foreign currency transaction. Forward contracts ...
  4. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  5. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  2. Commodities: The Portfolio Hedge
    Active Trading

    Commodities: The Portfolio Hedge

  3. Commodity Prices And Currency Movements
    Forex Education

    Commodity Prices And Currency Movements

  4. Not All Oil Economies Are Created Equal
    Investing Basics

    Not All Oil Economies Are Created Equal

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center