Which type of swap involves the exchange of cash flows based on commodity prices?

Which type of swap involves the exchange of cash flows based on commodity prices?

• A. Equity swap
• B. Interest rate swap
• C. Currency swap
• D. Commodity swap

Answer: (D)

The correct choice is anchored in the very definition of a commodity swap, which specifically involves the exchange of cash flows tied to the prices of physical commodities, such as oil, gold, or agricultural products. In a commodity swap, one party typically agrees to pay a fixed price for a commodity, while the other pays a floating price that fluctuates with market rates. This arrangement allows businesses to hedge against price fluctuations in the commodities they buy or sell, providing financial stability and predictability. In contrast, an equity swap involves exchanging cash flows that are based on the performance of equity securities, such as stocks. An interest rate swap focuses on exchanging cash flows based on fixed and floating interest rates, primarily involving debt instruments. A currency swap entails exchanging cash flows in different currencies, which addresses the fluctuations in foreign exchange rates. Each of these swaps serves different purposes in financial markets, highlighting the unique nature of commodity swaps in relation to commodity price movements.

The correct choice is anchored in the very definition of a commodity swap, which specifically involves the exchange of cash flows tied to the prices of physical commodities, such as oil, gold, or agricultural products. In a commodity swap, one party typically agrees to pay a fixed price for a commodity, while the other pays a floating price that fluctuates with market rates. This arrangement allows businesses to hedge against price fluctuations in the commodities they buy or sell, providing financial stability and predictability.

In contrast, an equity swap involves exchanging cash flows that are based on the performance of equity securities, such as stocks. An interest rate swap focuses on exchanging cash flows based on fixed and floating interest rates, primarily involving debt instruments. A currency swap entails exchanging cash flows in different currencies, which addresses the fluctuations in foreign exchange rates. Each of these swaps serves different purposes in financial markets, highlighting the unique nature of commodity swaps in relation to commodity price movements.