Financial swap

A financial swap is a derivative contract in which two parties agree to exchange cash flows based on the value of an underlying asset or index, without any physical delivery. In energy markets, financial swaps are widely used to manage exposure to crude oil, refined products, natural gas, power, and emissions prices. Typically, one party pays a fixed price while the other pays a floating price linked to a benchmark. Financial swaps allow producers, consumers, and utilities to hedge price risk efficiently while avoiding logistical complexity. They are also used by traders to express market views or arbitrage pricing differences. While swaps reduce exposure to price volatility, they introduce counterparty credit risk, which is managed through collateral, clearing, or credit agreements. Financial swaps form a core component of OTC energy trading and risk management.