In commodity swaps, what is traded?

In commodity swaps, parties agree to exchange cash flows related to fixed and variable prices for the same commodity over a specified period. The essence of a commodity swap involves one party paying a fixed price for a commodity, while the other party pays a variable price linked to a market index or the spot price of that commodity. This arrangement helps both parties manage their exposure to price fluctuations, allowing a producer to obtain certainty with fixed pricing and a consumer to take advantage of variable pricing if it decreases.

The other options do not accurately represent the mechanics of a commodity swap. For instance, trading future commodity prices for historical prices does not align with the objectives of swaps, which focus on managing future cash flows rather than dealing with past prices. The concept of exchanging commodities for cash payments is more closely associated with spot transactions rather than swaps, which involve cash flows based on price agreements. Lastly, swapping different types of commodities is not typically how swaps function; the focus is on the same commodity to maintain a direct price comparison between the fixed and variable payments.