Applied risk management series: OTC commodity swaps valuation, hedging and trading

OTC commodity swaps valuation, hedging and trading

OTC swap markets

In a fixed-for-floating swap, two parties agree to exchange the difference between a floating price and a fixed price, multiplied by a negotiated notional amount for one or more settlement periods. Single-settlement swaps are also referred to as ‘forwards’ by many market participants. Swaps are financially settled, which means that the parties meet their contractual obligations by cash transfers.

When a hedger enters into an over-the-counter swap, they receive compensation when the market moves

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