Commodity Swap

A solution for hedging commodity risks arising from potential adverse development of commodity prices.

How may we
assist you?

Hedge your transactions
against significant changes
in commodity prices

Select one of several available product modifications.

USEFUL INFORMATION

  • Solution for clients who wish to hedge risk of adverse changes in commodity market prices
  • Intended for individuals and legal entities, both domestic and foreign
  • Pre-agreed fixed forward price of a commodity is compared with daily closing prices or an officially quoted average commodity price (e.g. quarterly average) during the reference period
  • 2 to 5 business days from the end of the reference period, the difference between forward and market prices for the agreed commodity quantity is paid by the party in disadvantageous position
  • Transaction settlement is always financial, physicals are never exchanged
  • Settlement is calculated as PA = NA * abs(AVR - P), where:
    • PA – payment amount
    • NA – negotiated commodity amount
    • AVR – average price
    • P – agreed fixed price

Early termination of commodity swaps:

  • Transaction counterparties may agree to terminate commodity swaps early before maturity date
  • If a commodity swap is terminated early, parties settle the market value in a single payment - the transaction and any future liabilities thereby cease to exist

In addition to the standard product (plain vanilla commodity swap), three product modifications are available: 

Quanto

  • The underlying commodity is listed in a currency other than the settlement currency

Basket

  • The underlying asset is a basket of several commodities

Deferred price fixing

  • Fixed price is not known on the day the transaction is negotiated
  • Fixed price is determined on the basis of daily quoted averages over a specific future period  
  • Profit or loss from commodity transactions is affected by commodity price fluctuations
  • Clients will incur loss if the commodity prices move against them during an individual reference period – the clients’ payments exceed the amount to be paid by the bank
    • In this case, the client pays the difference between the two payments to the bank
    • In case the transaction was negotiated as a hedging instrument, the client regards the loss as cost of hedging (hedging protects clients from significant commodity price fluctuations that could result in financial problems)