Commodity swap,

Definition of Commodity swap:

1. A commodity swap is a type of derivative contract where two parties agree to exchange cash flows dependent on the price of an underlying commodity. A commodity swap is usually used to hedge against price swings in the market for a commodity, such as oil and livestock. Commodity swaps allow for the producers of a commodity and consumers to lock in a set price for a given commodity.

2. Arrangement in which (1) a fixed-price contract for a commodity is exchanged for its floating-price contract or (2) one commodity is exchanged for another. Commodity swaps are settled usually in cash, and sometimes by physical delivery.

3. Commodity swaps are not traded on exchanges. Rather, they are customized deals that are ■■■■■■■■ outside of formal exchanges and without the oversight of an exchange regulator. Most often, the deals are created by financial services companies.