Commodity and Inflation Swaps · Swaps Trading Guide
Commodity swaps can exchange a fixed price for a floating benchmark. Producers and consumers usually need opposite payment directions to hedge their physical exposure.
Start with the physical business
A producer generally loses revenue when the commodity price falls. A consumer generally faces higher costs when it rises. A simple producer hedge receives a fixed swap price and pays the floating reference. A consumer hedge does the opposite. The swap ordinarily settles financially, so it does not by itself arrange storage, transport or physical delivery.
Calculate the consumer hedge
Assume a consumer pays a fixed $80 per barrel and receives the monthly benchmark on 10,000 barrels. If the benchmark settles at $87, the swap pays the consumer $70,000. A physical purchase at that same $87 benchmark costs $870,000. Combining the two produces an $800,000 cost before premiums, transport, financing and other charges.
Accept the other side of the hedge
If the reference falls to $74, the consumer pays $60,000 under the swap. A matching physical purchase costs $740,000, leaving the same simplified combined cost of $800,000. The hedge trades favorable price participation for more predictable costs. It is not an extra profit stream independent of the physical business.
Check the benchmark and volume
A contract must specify product quality, location, currency, unit and pricing period. A Brent linked swap is not an exact hedge for every oil product. If actual consumption differs from the hedged volume, part of the swap may become an additional market position.
Try it yourself
A producer receives a fixed $250 per tonne and pays a floating $230 on 2,000 tonnes. What is the swap settlement?
Show the worked answer
The producer receives $40,000. If the physical sale also realizes $230 per tonne on the same volume, combined revenue is $500,000 before other costs.
Further reading
Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.
