Description:-
In an commodity swap, two parties make a series of payments to each other with at least one set of payments determined by a commodity . The other set of payments can be a fixed or floating rate or the return on another commodity. Commodity swaps are used to substitute for a direct transaction in commodity.
Why are they traded?
A company that uses a lot of oil might use a commodity swap to secure a maximum price for oil. In return, the company receives payments based on the market price (usually an oil price index).
On the other side, if a producer of oil wishes to fix its income, it would agree to pay the market price to a financial institution in return for receiving fixed payments for the commodity.
Life cycle events: –
Interest and financing leg.
OTCWIRE 