An electricity swap contract which involves referencing a specified quantity of power to the variable spot price at either the generator’s or consumer’s location. Such a swap is ordinarily used to hedge the variability of cash flow caused by fluctuations in the price of electricity. A basis swap version is also commonly used to lock in a fixed price at a location other than the delivery point of the futures contract. That is, the buyer of an electricity basis swap agrees either to pay or receive the difference between the preset contract price and the locational spot price at the time of trade. Electricity price swaps constitute a subclass of a broader class of commodity-linked products, such as those referenced to the prices of raw materials, energy, etc.
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