Value Commodity Swaps Here

Problem : An oil-consuming client needs to buy oil in the future and wishes to immunise against future oil price movement.

Solution : The client asks a bank to enter a Commodity Swap in which the bank pays periodically to the client a floating amount indexed on the front oil future contract's price at the coupon date. In exchange for this, the client pays periodically an amount K that is fixed at deal time. The notional amount of the deal the client enters into with the bank matches the client's anticipated oil consumption. The observed contract price is most often averaged, so as to smooth the effect of large future price variations near maturity of the oil futures contract.

Example Term Sheet And Valuation :

Deal : Swap fixed coupon payments in the numéraire currency for the arithmetic average of daily observations of the front Futures contract in the underlying commodity.

Daily Observations are made on each business day of the period month. Each Period is cash-settled in the numéraire currency on the business day immediately following the last business day of the period month.

Terms :

Schedule Table :

© Reference Derivatives 2011