What risk can commodity swaps effectively manage?

Commodity swaps are primarily designed to manage fixed pricing uncertainty. They allow parties to exchange cash flows related to the prices of physical commodities, providing a means to hedge against price fluctuations over time. In a commodity swap, one party typically pays a fixed price for a commodity, while the other pays a variable price that reflects the market price of the commodity at the time of delivery.

By locking in a fixed price, entities involved in commodity swaps can protect themselves against volatility in the market prices of commodities, which is a common risk they face. This provides them with greater predictability in their budgeting and financial planning, making it easier to manage their operational costs and profit margins.

The option referring to market volatility is relevant since commodity prices are inherently volatile, but the swap itself specifically addresses the uncertainty of pricing by creating a stable fixed price for the buyer, mitigating the risks associated with unpredictable market movements.