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A swap is a contract in which two counterparties undertake to make reciprocal periodic payments whose calculation rules and frequency are defined in the contract. Such product is used in order to set the price of the underlying in advance: the buyer and the seller agree to exchange future payments periodically. The first one pays a fixed price while the second one pays a variable price which depends on the market price of the underlying.
This instrument allows to manage the price risk in the energy markets.
Normally, the underlying of this kind of contracts is the daily closing price of the December future on EUA (European Emission Allowances) on ICE or EEX published during the calculation period defined in the contract, expressed in EUR/t. However, it is also possible to evaluate alternatives if necessary.
The future price of the certificate is set today.
No immediate disbursement
No need to pay immediately: the initial value of the contract is 0.
Price risk coverage
Reduced exposure to market price.
The following graphs show the value of a swap contract for different levels of the underlying. In the event of a purchase, the contract has a higher value as the price of the underlying market increases. If, for example, a purchase contract was signed for the month of May at a price of 20 €/t, as the market price increases, there will be a greater gain deriving from the signing of the contract. On the contrary, in cases of price reduction, there will be a loss proportional to the difference between the market price and the purchase price.
In the event of sale, the contract has a higher value as the price of the underlying market decreases. If, for example, a sale contract was signed for the month of May at a price of 20 €/t, as the market price decreases, there will be a greater gain deriving from the signing of the contract. On the contrary, in cases of price increases, there will be a loss proportional to the difference between the market price and the selling price.