Commodity Swap

A commodity swap is an OTC derivative agreement between two counterparties in which one party pays a fixed price for a commodity and the other pays the prevailing floating market price — with both parties exchanging only the cash difference rather than actually delivering the physical commodity. The most common structure is a fixed-for-floating swap: the fixed-price payer commits to a pre-agreed price for a notional quantity of the commodity over a series of settlement periods, while the floating-price payer pays the average spot market price for each period. If spot prices exceed the fixed price, the fixed-price payer benefits; if spot prices fall below the fixed price, the floating-price payer benefits. Commodity swaps are primarily used by large industrial consumers and producers for long-term price hedging — an Indian power company using natural gas might enter a commodity swap to fix its fuel cost over 12 to 24 months, protecting against natural gas price spikes while a gas producer uses the same swap to protect against price declines. In India, commodity swaps are OTC instruments primarily accessed by institutional and corporate participants — India's commodity derivatives market on MCX and NCDEX focuses on standardised exchange-traded futures and options rather than customised OTC swaps, which are more prevalent in global commodity markets centered in London, New York, and Singapore.