Swaps
Buying a swap is recommended for consumer hedgers that aim to lock-in a price for a given period of time. By using a calendar swap, the hedger will collect a cash settlement each month for the difference between the average settlement price recorded by the exchange and the swap price agreed. These instruments are often referred to as a "contract for differences". There is no cost to use a swap aside from exchange clearing fees and brokerage if any. However, using swaps requires the posting of collateral margin. Therefore, this hedging strategy is only appropriate for those that can withstand ongoing cash demands for collateral.

Buying Swap

How it works
After a swap price is agreed, the hedger will post cash collateral known as initial margin in their clearing account. This amount is determined by the exchange however the rule of thumb is 10% of the total position value. Each day the account is settled according to the current market price. The daily gain or loss is reflected in the customer account. No additional cash is posted unless the swap loses more value than the initial margin. The hedger could be asked to post additional cash if the position has suffered a loss more than the collateral posted. This is known as a margin call.

If the hedger is long a swap, a LOWER market price will result in a position loss. A higher price will result in a position gain (profit) and the hedger may have surplus margin in their account.

 

 

 

 

 

 

 

 

 

Selling Swaps

How it works
If the hedger is short a swap, a HIGHER market price will result in a position loss. A lower price will result in a position gain (profit) and the hedger may have surplus margin in their account. This process will repeat until the expiry of the contract.