Swap
A swap is a good way to fix the future fuel price for a specific period. The main areas to hedge using swaps are in Rotterdam, Singapore and on the US Gulf Coast. This means that there will be a small basis risk from the swap to the actual port (this risk can be eliminated with a Physical Fixed Price).
Rewards
- Protection against rising markets
- No upfront premium
- Flexibility in physical supply
Risks
- Opportunity cost if the market falls
- Basis risk in some cases
Swap example
In December you decided to buy 3.5% Rotterdam Fob Barges for January and February at a fixed price $520/mt 1,000mt per month.
The average settlement price settled in January ends at $515 and $528 in February.
This means you pay OW Bunker $5,000 in January, and receive $8,000 from us in February.
The total profit of your hedge is $3,000.
