Commodity Swap

Hedge your transactions against significant changes in commodity prices

Assistance and proposed strategy by a team of specialists

Choice of several product modifications

Negotiate each transaction with a dealer over the telephone

Keep track of all your transactions with confirmations

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

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)

Useful information