Like a currency or interest rate swap, a commodity swap is a contractual agreement to trade one cash flow for another.
Commodity swaps are facilitated by Swap Dealers (SDs) who pair up various companies, mostly in the oil industry, who are looking to trade a floating (market price) cash flow outlay for a fixed one, or vice-versa.
Futures Commission Merchants (FCMs) are the agents licensed by the National Futures Association to solicit and broker commodity swaps through Swap Dealers (SDs). (Requirements — found here)
Swaps are over-the-counter instruments that are customizable for each situation. Commodity swaps are not unlike interest rate swaps in the Forex market, but instead of the floating rate being dependent on LIBOR or the Federal Funds Rate, it is dependent on the market price of a commodity.
A Swaps Dealer effectively pairs two companies who would like to trade a fixed price of goods in the future for a floating price (spot price) of the same kind of goods in the future. It is possible that this arrangement gives the recipient of the floating leg a discount from the actual spot price in the future.
Consider how the local power company might give a customer the option of paying a flat fee per month (based on previous usage perhaps) instead of paying as-you-go (which is analogous to spot pricing in this example).
The power company could then go take those two groups of cash flows to a swap dealer to see if there would be a hedge or advantage that they could pick up from swapping cash flows with another company in the industry.
Like an interest rate swap in the forex market, no principal amount is exchanged, only the cash flows based on a notional principal amount.
What is a Foreign Currency Swap?
What does Over-the-Counter (OTC) mean?
There are many services online and custodians that that can facilitate stock trades. Anybody can buy shares of a...
A corporation is a business entity which has filed articles of incorporation
Another way to participate in IPOs is to pick up shares of mutual funds and ETFs that invest in them for you
SEP IRAs do not have to be established until taxes are filed for the year, and it can be done quickly
Medicare Part B covers some doctors visits, outpatient care, and many other services not covered by Part A
A Bitcoin Fork is when the blockchain is offered a modified currency protocol that is adopted by some of the Bitcoin community, which creates a “fork”
The Federal Trade Commission (FTC) was originally created to encourage market competition and to protect consumers
A bull put spread is used when an investor thinks the price of a security is set to rise modestly. The strategy involves
Arbitrage is when an investor can pick up something in one market that has a higher value in another market
The Rising (Bullish) Pennant pattern looks like a pennant. It forms when rising prices experience a consolidation period