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Derivatives


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Partial Fill Plus Option Swap


Mostly, a commodity swap with an option-like feature where one counterparty receives an above-market fixed rate and pays the at-market floating rate. In consideration for the off-market fixed rate, the fixed-rate receiver gives the floating rate receiver the right to double the notional principal amount if the underlying rate/price has ended up above the swap rate.

For example, a power generating utility which consumes 50,000 barrel of oil every day may consider entering such a swap against paying $0.5 above the market swap rate on, say, 30,000 barrels.

If oil prices moved up well above current prices, then the floating rate receiver will exercise the option, receiving consequently a floating rate twice the notional amount of the swap. If, on the contrary, oil prices dropped relative to current prices, then the option will not be exercised (and hence it expires worthless), and the floating rate receiver receives a normal floating rate. The fixed rate receiver will be better off by a net $0.5 × 30,000, or $15,000.


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