Swaps question

Don’t understand…

“the manager will purchase oil in the aspot market, and because spot is above swap fixed, the manager will receive a payment from the dealer. [this is fine!]. If the spot had been below the swap fixed price, the manager would have to make a payment to the dealer” … I know this is prob a stupid Q, but surely the whole point of the swap is to hedge the commodity price. If the manager either receives or pays a payment depending on if the spot is above his fixed rate, then surely he’s still getting a variable price???

Thanks

Actually… Clearly he’s the receive variable and pay fixed. Thus the other side has hedged THEIR price. Maybe he likes volatility!? Actually… why would the buyer/user of oil want to receive the variable side of a swap? Why wouldn’t they enter the receive fixed side?

maybe they believe oil prices will decrease?

has to be a buyer/seller for everything,

Actually… Clearly he’s the receive variable and pay fixed. Thus the other side has hedged THEIR price. Maybe he likes volatility!? Actually… why would the buyer/user of oil want to receive the variable side of a swap? Why wouldn’t they enter the receive fixed side?

it was a financial settlement, not for delivery.

If it is a financial settlement and the manager is fixed payer, when spot is above the fixed rate, other party (variable payer) pay the gap to the manager and vise versa (the parties net the paymet). In other words if fixed payment is 10 and spot price is 8. Manager pays 10 and recive 8. That is net payment of 2 by the manager.

fixed = pay the agreed fixed rate of swap

floating = receive the variable price of oil .

Works good if variable price of oil is higher than swap

Hedge does not work that well if oil price below the swap price. But he’s not complaining , is he?

Whole point of hedging is to reduce risk , and for a directional investment like swaps , you can pay for it by losing the upside.

If you want to keep the loss fixed , use options

etc etc