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Financial Swaps

08/13/2024

John Hull, in the financial classic, Introduction to Futures and Options Markets, defines a swap this way.

“An agreement to exchange cash flows in the future according to a prearranged formula.”

Financial swaps in energy involve the buyer paying a fixed price and the seller paying a variable price.

For propane, and almost all energy commodities, financial swaps work in this manner:

The buyer of the swap will pay the seller a fixed price.
The seller of the swap will pay the buyer a floating (variable) price. This variable price is often an average value.

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