The price of a commodity buying or selling due at a future date or period may be fixed by means of a commodity swap.

A commodity swap transaction is an agreement based on which two parties exchange their cash flows over a predetermined period. A party exchanges a fixed-rate liability or claim for one expressed in a variable price depending on the evolution of the exchange rate for the specified commodity product.

Depending on the basic product, two types of swaps are distinguished; in both cases, we conclude a financially settled product with our clients.

European type swap (bullet)

The clearing price is a predetermined reference price quoted at a future date, similar to a stock exchange futures transaction. These types of transactions are normally physically delivered and therefore the position must be closed before maturity and accounted for financially (net) or “rolled over” to a more distant date.

Asian (average price) swap

The clearing price is the average price of a future period, typically a given month. Settlement of the transaction is carried out after the relevant period.

Example transaction

Your commodity market risk arises from fluctuations in the rapeseed exchange rate. To mitigate the risk, you want to fix the selling price in advance.

You sell rapeseed from time to time, the total annual production is 5000 mt (metric tons). The physical selling of the basic product is recorded in Euronext (Matif) futures quotes. When selling a product, current futures quotes determine the strike price.

For you, the fall in the listing of the product – in our example, the February rapeseed price – is the risk that you need to guard against. Therefore, a futures transaction with the following parameters is concluded.

If you sell the commodity at a fixed price in the swap transaction, in the event of a fall in the price of rapeseed, you may have an exchange rate gain at the closing of the transaction, but at the same time, in the event of an increase in the market price of rapeseed, you may record a financial loss at the closing of the transaction.

• In the event that the rapeseed price falls, you win on the hedge (in the swap, you close the transaction at a lower rate), while you can also physically sell the product at a lower rate.
• In the event that the rapeseed price rises, you will incur a loss on the hedge (in the swap, you close the transaction at a higher rate), so you can also physically sell the product at a higher rate.
• The “physical selling leg” of rapeseed and the “commodity swap derivative leg” together result in a sell price of 380.

Benefits

• By entering into a transaction, the price of the variable (index-bound) base product can be exchanged for a fixed price.
• You can choose from a wide range of products for both agricultural products and energy carriers.

Risks

• It is recommended to close the hedge transaction only when the physical transaction is terminated (physical buying or selling of the base product takes place).
• The degree of exchange rate movements (volatility) is expected to be higher than, for example, in the case of foreign exchange.
• Financial gains/losses are incurred in currencies other than forints (EUR, USD).
  
  

Experts

If you would like to become a client of OTP Global Markets, feel free to contact us.

Useful documents

These documents in English language to the person concerned shall be for information purposes only. OTP Bank Plc shall fulfil its obligations imposed by the legal regulations or requirement of supervisory authority by the documents in Hungarian language.
In the event of any discrepancy between the English language and Hungarian language versions, the Hungarian language version shall prevail.

Information on the suspension of the market making obligation (available only in Hungarian)