Swaps
A swap is a financial agreement between two parties to exchange payment streams based on different underlying assets or variables.
Example of how it works
You agree to receive a fixed price of $80 per ton.
Scenario 1 – Oil prices increase: The price of oil increases to $100 per ton. In this case, you receive the fixed price of $80 per ton according to the swap agreement. However, since the market price is now higher at $100 per ton, you miss out on the additional revenue. This results in a loss of $20 per ton. Despite this loss on the swap, your business benefits from higher revenue due to the increased oil prices.
Scenario 2 – Oil prices decline: The price of oil declines to $60 per ton. In this case, you receive the fixed price of $80 per ton according to the swap agreement. Despite the market price being lower at $60 per ton, you receive the difference of $20 per ton. This results in a gain of $20 per ton, offsetting the lower revenue you would have received due to the decreased oil prices.
Before you open your financial hedging position, you first need to agree upon the floowing things:
⇒ A period for your hedging (E.g. six months)
⇒ A hedging volume for each month
⇒ The product that should be hedged
⇒ The trading currency (EUR, DKK, GBP, USD or contact for others)
⇒ A fixed price
ADVANTAGES AND RISKS
↑ Protection against price fluctuations
↑ Creates predictability for your bottom line
↑ Potential upside if prices increase
↓ Potential loss if prices decrease
Let us secure your bottom line
We are ready to assist with risk management of all kinds of energy products and services, so if your company’s budget is affected by energy price fluctuations, don’t hesitate to contact us!