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About Commodity Swap
- Solution for clients who wish to hedge risk of changes in commodity market prices
- Pre-agreed fixed forward price of a commodity is compared to daily closing prices or officially quoted average commodity price (e.g. quarterly average) during the reference period
- 2 to 5 working days after the end of the reference period, the difference between forward and market prices 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
You might also like to know
In addition to the plain vanilla commodity swap, there are three product modifications available:
- The underlying commodity price is quoted in another currency – different from the settlement currency
- The underlying is a basket of several commodities
Deferred price fixing:
- The fixed forward price is not known on the day the transaction is negotiated
- The fixed price is determined on the basis of daily quoted averages over a specific future period
Early termination of commodity swaps:
- Transaction counterparties may agree to terminate commodity swaps early before maturity date
- If a commodity swap is terminated early a single payment of market value is made. Any future liabilities thereby cease to exist
Important information for you
- Profit or loss from commodity transactions is affected by commodity price fluctuations
The client will incur loss if the commodity prices move against him during individual reference period – the client’s payment exceeds the amount to be paid by the bank
- In this case, the client pays a difference of the two payments to the bank
- In case the transaction was negotiated as a hedging instrument, the loss represents cost of hedging (hedging protects clients from significant commodity price fluctuations that could result in financial problems)
Entrepreneurs and legal entities – domiciled in the Czech Republic and abroad.
Commodity swaps are used to hedge adverse movements of commodity market prices.