A swap strip (sws) is simply a strip of Swap instruments.
The swap strip instrument contains a series of settlement dates. For each settlement date, there are a series of fixing dates on which the underlying asset price is sampled.
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In addition, you can enter into a composite or quanto version of this instrument. |
The settlement itself is usually made in cash at fixed intervals.
Example of a Swap Strip
Asia Energy (the swap buyer) needs to buy 100,000 barrels of oil a month between January and June. It wants to lock in a price for this purchase. The First Bank (the swap provider) offers it a swap rate of $15 per barrel, based on daily fixings.
Asia Energy (the swap buyer) needs to buy 100,000 barrels of oil a month between January and June. It wants to lock in a price for this purchase. The First Bank (the swap provider) offers it a swap rate of $15 per barrel, based on daily fixings.
In theory, on each settlement date, Asia Energy pays First Bank the fixed rate and receives the floating rate. In practice, only the actual cash difference is transferred. If on a given settlement date:
The average underlying (the nearest future) for a barrel of gas oil turns out to be more than the fixed rate, Asia Energy receives a cash amount equal to the difference between the two rates. This offsets their increased physical fuel costs, i.e., the fact that it will cost them more to buy oil in the market.
The average underlying (the nearest future) for a barrel of gas oil turns out to be less than the fixed rate, Asia Energy must pay a cash amount equal to the difference between the two rates. This loss is offset by the fact that it will cost them less to buy oil in the market.