Business Clients Commodity Risk Management

Commodity swap

The commodity swap is a derivative financial instrument for exchange of payments, based on an agreed notional quantity of the raw materials at future dates which are determined at the execution of the transaction. The objective is to avoid undesirable market variations of the price of the commodity price by fixing it. In the case of a commodity swap deal, one party makes fixed payments, the other – floating payments, based on a defined index, futures or other reference price.

The Bank offers two types of commodity swaps, depending on the reference price – Asian and European. The reference price is the average reference price for the period in the case of an Asian swap and the price at maturity in the case of an European swap.

Terms of the transactions: Up to one year and longer term under certain conditions.
Currency: The currency of the offered commodity swaps can be EUR or USD, depending on the currency in which the commodity is mainly traded.
Commodities: The commodities, which can be hedged are industrial metals (copper, zinc, aluminum, lead, steel, nickel), precious metals (gold, silver), energy products (petrol and gas) and grains (rapeseed, wheat, corn, maize), as well as sugar, cocoa and others.
Objectives: The commodity swap is used for hedging exposures towards exchange traded commodities.

Target market of the product

The Commodity Swap is a financial instrument, which the Bank manufactures and distributes as a product. The table below sets out the criteria for determining for which client profile the product is compatible with or not.

	Positive	Negative
Type of clients	retail and professional clients with exposure to specific exchange traded commodities
Clients’ knowledge and experience	- the movement and the possible expectations regarding the hedged exchange traded commodities values; - lost profits or realized losses related to a negative change in exchange traded commodities values for the client; - hedging the cash flows by buying Commodity Swap, related to payments of the client on exchange traded commodities; - maintenance of collateral required when concluding a Commodity Swap transaction	does not meet the indicated knowledge and experience requirements
Clients’ financial situation with a focus on the ability to bear losses	- to suffer a negative result on periodic netting payments on Commodity Swap transaction within the term of the instrument; - the existence of an exposure at which payments are offset by cash inflows or outflows, related to exchange traded commodities
Clients’ risk tolerance and compatibility of the risk	if the objective is hedging, the client’s risk appetite will not be considered	inclined to bear the risks of deviations of exchange traded commodities prices
Clients’ objectives and needs	to hedge an exposure