Commodity Swaps
Price and value a fixed-for-floating commodity swap: one side pays a fixed price per unit, the other pays the floating market price, and only the difference is settled each period. See the swap price, the value to each side, every period's payments, the sensitivity to the forward curve and a settlement calculator.
Learning focus: a commodity swap is a strip of forward contracts at one fixed price, so the swap price is the average of the forward prices weighted by quantity × discount factor, and the swap is worth zero only at that price.
The fixed payer who buys the physical commodity at the floating price P and receives P − K from the swap pays K overall: the swap locks in the fixed price whatever P turns out to be, ignoring any basis between the physical purchase price and the swap's floating index.
One row per settlement date, nearest first. The forward is the forward or futures price for that date's floating price. Leave quantity blank to use the quantity per period.
| # | Forward | DF | Weight | Fixed payment | Expected floating | Net to you | PV of net |
|---|---|---|---|---|---|---|---|
| 1 | 78.00 | 0.990050 | 25.38% | 765,000.00 | 780,000.00 | 15,000.00 | 14,850.75 |
| 2 | 77.20 | 0.980199 | 25.12% | 765,000.00 | 772,000.00 | 7,000.00 | 6,861.39 |
| 3 | 76.50 | 0.970446 | 24.87% | 765,000.00 | 765,000.00 | 0.00 | 0.00 |
| 4 | 75.90 | 0.960789 | 24.63% | 765,000.00 | 759,000.00 | −6,000.00 | −5,764.74 |
| Sum = swap value to you | 15,947.40 | ||||||
Fixed payment = Q × K; expected floating = Q × F, the floating payment if the price ends at today's forward. Net is from your side; PV = net × DF. Weight is Qᵢ × DFᵢ ÷ Σ Q × DF, each forward's share of the swap price.
The swap price is a single fixed price that sits inside the forward curve, where the discounted gains on the periods above it offset the losses on the periods below it.
Each bar is one settlement's expected net payment discounted to today, and the line adds them up to the swap's value to you.
The forward curve slopes down (−2.80 per barrel per year): backwardation. Later deliveries are cheaper than nearer ones, which happens when holding the physical commodity is valuable (a high convenience yield, often when inventories are tight) relative to financing and storage costs.
Why a weighted average: the swap is a strip of forward contracts, all at the same fixed price K. Each one is worth Qᵢ × DFᵢ × (Fᵢ − K) today, so the K that makes their sum zero is Σ Qᵢ × DFᵢ × Fᵢ ÷ Σ Qᵢ × DFᵢ. Each forward is weighted by its quantity times its DF, so periods with larger quantities count more, and nearer dates, with larger DFs, count a little more; so here the swap price is 76.9088 against a simple average of 76.9000. In backwardation the fixed payer expects to receive net payments on the early settlements and to make them on the later ones, so once the early ones are paid the fixed receiver is owed value and carries the credit exposure.