Commodity Swap

A┬ácommodity swap is a swap in which one of the payment streams for a commodity is fixed and the other is floating. Usually only the payment streams, not the principal, are exchanged, although physical delivery is becoming increasingly common. Commodity swaps have been in existence since the mid-1970’s and enable producers and consumers to hedge commodity prices. Usually, the consumer would be a fixed payer to hedge against rising input prices. The producer in this case pays floating (i.e., receiving fixed for the product) thereby hedging against falls in the price of the commodity. If the floating-rate price of the commodity is higher than the fixed price, the difference is paid by the floating payer, and vice versa.

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