Swaps

As the trading environment has evolved and become increasingly volatile, Parex banka has identified the need for specific energy hedging instruments aimed at the oil industry and the larger end-users of petroleum products.

Swaps are OTC contracts (agreed directly between two parties) for the exchange of a Fixed Price against a Floating Price, whereby the Buyer of the Swap buys a fixed price and sells a floating price and the Seller of the Swap sells a fixed price and buys a floating price. Swaps are used to lock in a fixed price now for a commodity that will be delivered in the future. Swaps are always cash-settled (there are no physical deliveries).

The net result of buying a Swap is that the hedger (for example a shipping company)’s cost for the commodity is fixed, no matter what happens in the marketplace.
If the hedger (for example a trader) is selling the Swap, the payment he will receive for the commodity is fixed, whatever happens to the market.

The trading of Swaps is reserved to market players with a high degree of financial sophistication and who will be able to keep themselves informed of the latest developments. Swaps are usually used as a hedging tool more than as a purely speculative instrument. Speculative trading of OTC Swaps is best kept in the hands of professional traders who are closely monitoring the market.

Should you have any questions, please contact us at the Capital Market and Investments Department by phone: (+371) 701-00-08, fax: (+371) 701-01-91 (GMT +2) or e-mail: margin@parex.lv.

If you want to read more about trading and hedging Energy with Parex banka’s energy derivatives, click on the following presentation.

Trading Enegy Derivatives