A commodity swap is similar to a fixed-floating
interest rate swap. The difference is that in an interest rate swap, the floating leg is based on standard interest rates such as
LIBOR and
EURIBOR. However, in a commodity swap, the floating leg is based on the price of underlying commodity like oil, sugar, and precious metals. No commodities are exchanged during the trade. In this swap, the user of a
commodity would secure a maximum price and agree to pay a
financial institution this fixed price. Then, in return, the user would get payments based on the market price for the commodity involved. On the other side, a producer wishes to fix the income and would agree to pay the market price to a financial institution, in return for receiving fixed payments for the commodity. ==References==