Loans and financial matters

Just as currencies, interest rates, and equities can be used to structure swaps, so too can commodities and just about anything that has a random outcome and to which a corporation, financial institution, or even an individual is exposed. Commodity swaps are very commonly used. For example, airlines enter into swaps to hedge their future purchases of jet fuel. They agree to make fixed payments to a swap dealer on regularly scheduled dates and receive payments determined by the price of jet fuel. Gold mining companies use swaps to hedge future deliveries of gold. Other parties dealing in such commodities as natural gas and precious metals often use swaps to lock in prices for future purchases and sales. In addition, swaps can be based on non-storable commodities, like electricity and the weather. In the case of the weather, payments are made based on a measure of a particular
weather factor, such as amounts of rain, snowfall, or weather-related damage. We have now introduced and described the basic structure of swaps. We have made many references to the pricing and valuation of swaps, and we now move on to explore how this is done.