Commodity Swap

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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.

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RELATED FAQS
  1. What would motivate an entity to enter into a swap agreement?

    The main purpose of swap agreements is to swap cash flows between counterparties for a certain market or asset. Generally, ... Read Full Answer >>
  2. How are risk weighted assets used to calculate the solvency ratio in regulatory capital ...

    Risk-weighted assets are the denominator in the calculation to determine the solvency ratio under the provisions of the Basel ... Read Full Answer >>
  3. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  4. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  5. How does an entrepreneur choose a business structure?

    Swaps are derivative contracts between two parties that involve the exchange of cash flows. Interest rate swaps involve exchanging ... Read Full Answer >>
  6. When was the first swap agreement and why were swaps created?

    Swap agreements originated from agreements created in Great Britain in the 1970s to circumvent foreign exchange controls ... Read Full Answer >>
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