Commodity Swap

ORE defines the plain form as follows:

A Commodity Swap involves the exchange of floating commodity prices against a fixed known commodity price, with cash settlement either at the end of the swap or on a monthly basis.

Source: ORE User Guide, Products catalogue, commodityswap.tex.

ORE defines the basis form as follows:

A Commodity Basis Swap involves the exchange of the spread between floating commodity prices against a fixed known spread K, with cash settlement either at the end of the swap or on a monthly basis.

Source: ORE User Guide, Products catalogue, commodityswap.tex.

A commodity swap is a series of commodity forwards in one contract. One side pays an average of market prices over each period. The other side pays a fixed price. The exposure is to the price level, settled in cash without moving the commodity.

The trade uses SwapData with CommodityFixed and CommodityFloating legs. A long position computes the average of the difference between the variable fixing and the fixed strike at each fixing date. The fixing can be a spot price, possibly the average of the high and low values of the day in a given source. It can also be the price of the prompt future, the earliest futures expiry after the fixing date. The final payoff of a period is the arithmetic average of the period contributions, settled in cash with a delay after the period, or rolled up into one payment after the swap end.

ORE also supports netting of the floating legs. With RoundNettedFloatingLegs on, all floating leg cash flows with the same payment date are netted into one cash flow. NettingPrecision sets the rounding of the netted average fixing.

Each pricing date contributes the fixing minus the strike, per unit. The period payoff is the arithmetic average of the contributions. The swap value is the sum of the period payoffs, discounted. A long position gains when the average price rises above the strike.

• The commodity price curve at each fixing date. It drives the expected fixings.
• The spread of the two references, for a basis swap.
• The discount curve of the settlement currency.
• The strike and the quantity per period.
• The averaging conventions, the fixing source, and the payment lag.

A long fixed-price payer gains when commodity prices fall below the strike. The floating receiver gains when they rise.

Each fixing turns one unknown contribution into a known one. The remaining periods keep their exposure to the forward curve. Near the end of the swap the outstanding fixings narrow to the last period. At maturity the final average settles and the swap stops.

A consumer with a stream of commodity purchases swaps floating prices to fixed and removes budget risk. A producer swaps fixed to floating to keep market exposure. The product hedges a price series, not one delivery. In ORE Studio a customer books commodity swaps to value them and run sensitivities on the ORE engine.

ORE's catalogue shows the trade with its two legs:

<Trade id="...">
  <TradeType>CommoditySwap</TradeType>
  <Envelope>
  </Envelope>
  <SwapData>
    <LegData>
      <LegType>CommodityFixed</LegType>
      ...
    </LegData>
    <LegData>
      <LegType>CommodityFloating</LegType>
      ...
    </LegData>
    <RoundNettedFloatingLegs>true</RoundNettedFloatingLegs>
    <NettingPrecision>2</NettingPrecision>
  </SwapData>
</Trade>

Source: ORE User Guide, Products catalogue, commodityswap.tex, listing Commodity Swap (leg detail abbreviated).

The Commodity Forward is the single-period form of the same exposure. The Commodity Swaption options its start.