Commodity swap

A commodity swap is a financial derivative in which two parties exchange cash flows based on the price of a commodity. Typically, one party pays a fixed price while the other pays a floating price linked to a benchmark index or spot settlement. Commodity swaps are widely used in energy, metals, agriculture, and other raw material markets to manage exposure to price volatility. Producers may use swaps to secure revenue certainty, while consumers might use them to stabilise procurement costs. Traders deploy swaps for hedging, arbitrage, and expressing market views without handling physical commodities. These instruments can be customised in terms of tenor, volume, and reference index, which makes them suitable for managing basis risks between different grades, regions, or delivery periods. Commodity swaps often settle financially rather than through physical delivery, simplifying logistics and credit management. Pricing reflects forward curves, interest rates, supply–demand expectations, and counterparty credit considerations. As markets evolve, swaps remain essential tools for structuring risk-managed exposure, particularly in sectors where commodity prices directly influence profitability, investment planning, and cash-flow stability.