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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.
In the case of swaps on Brent, WTI, RBOB, HO, Gasoil, Jet Fuel, FO 3.5% and product spreads there is no physical exchange of the underlying, in fact only cash flows deriving from the difference between the fixed price and the variable price are exchanged.
This instrument allows to manage the price risk in the market. In the case of oil products, swaps can be used to reduce risk in the event of a rise in the market (for a utility company) or in the event of a fall (for a producer).
These products can be indexed to different underlyings: Brent, WTI, RBOB, Heating oil, Gasoil, Fuel and optionally spread on these products.
The future price of oil 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 70 USD/bbl, 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 70 USD/bbl, 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.