Commodity basis swap
Value the average difference between two commodity references against a contractual differential, with separate tracking of determined and open components.
How it works
A basis swap focuses on relative prices rather than one outright commodity price. Each reference can independently be an organization quote or a listed Future. The two references share the same observation dates, allowing each day's spread to contribute equally to the contract result.
Key contract terms
- Purchase or sale and total quantity
- Reference A and reference B, each with its own price source
- Exactly matching currency and commodity unit
- Common averaging period and fixing calendar
- Contractual differential K, which may be positive, zero or negative
Payoff: the contractual result
For a purchase, payoff is quantity × (average of A − B − K). A sale reverses the sign. The quantity is divided equally among fixing days. Before period end, the valuation discounts these components and separates finalized amounts from remaining exposure.
A simple example
For a purchase of 100 units, average A is EUR 220 and average B is EUR 205. With K = EUR 10 per unit, the final result is 100 × (220 − 205 − 10) = EUR 500. The corresponding sale produces EUR −500.
Illustrative amounts exclude fees and currency conversion. A payoff is distinct from the instrument's value before maturity.
Lifecycle
- Contract created
- Two references for each fixing
- Progressive realization
- All components finalized
- Create the two price references, common fixing calendar and contractual differential.
- At each fixing date, observe both references. The corresponding component becomes realized only when both values are final under their respective data rules.
- Realization is progressive: confirmed components and still-open components coexist. It does not require a user exercise or create a separate position for each day.
- All components must be final to finalize the whole contract. Corrections to source prices may change previously realized amounts on revaluation; realized does not mean already paid.
Using this instrument in OTCValue
There is no currency or unit conversion between references. A quote independent of Futures may carry forward its last known price and become final after fixing day. Future-dependent references require exact settlements. Futures must cover the averaging period. This models a differential, not an option; realization does not record payment.