In addition to futures contracts, other common oil-related contracts 

traded on foreign exchanges include options, swap futures, 

and spread contracts. Below are denitions of these derivative 

products:

Options:

Options are contracts between a buyer and a seller, wherein the 

buyer, after paying a certain sum (known as the “premium”) to the 

seller, acquires the right, but not the obligation, to, depending on 

the option, either buy from or sell to the seller a specic quantity 

of the underlying asset at a pre-determined price (“strike price”), 

either at any time before the option expires (in the case of an 

American option) or at a particular future date (in the case of a 

European option). For example, if a company buys, at $1 per barrel, 

a call option for 100,000 barrels of Brent which expires in one 

month with a strike price of $50 per barrel, the company can be 

assured that, with the $1 per barrel it has paid, it will only cost the 

buyer at a maximum price of $5,0 00,000 to buy 100,000 barrels 

by the expiry of the call option (excluding the cost of the option 

premium and any transaction fees). If the market price of Brent 

increases to $60 per barrel prior to expiry of this contract, the 

buyer may exercise the option and get the 100,000 barrels of Brent 

and pay $10 dollars below the current market price. If, on the other 

hand, the price of Brent drops below $40 per barrel, the company 

may choose to buy Brent in spot market rather than to exercise the 

option.

Swap Futures:

Commodity swaps are mostly traded in the over-the-counter (OTC) 

market and represent over 80% of OTC transactions. An increasing 

number of them are centrally cleared. Contrary to many futures, 

swaps are cash settled. A typical swap is often an agreement 

whereby a oating price is exchanged for a xed average price

of certain corresponding benchmark (such as a futures contract 

marker prices or settlement prices) over a specied period. For 

example, if party A (physical buyer) does a one-month long swap 

with bank B for buying 100,000 barrels of Brent crude at $50 per 

barrel against ICE Brent in April, the swap will be settled to the 

arithmetic mean of the futures daily settlement prices from April 

1 to April 30. If the mean comes out to be $55 per barrel, it means 

party A’s average cost of buying Brent is $55 dollar/barrel in April, 

however bank B will pay the $5 per barrel to party A for settlement 

of the swap of $500,000 (100,000 barrels * $5/barrel). Conversely, if 

the mean is $45 per barrel, then party A’s average cost of purchase 

the spot crude is lower, however, it has to pay $5 per barrel to bank 

B for settlement of the swap deal (totaling $500,000).

Spread contract:

Spread trades are a popular trading strategy. There are three main 

types of spread trades: calendar spreads, inter-exchange spreads, 

and inter-commodity spreads. For instance, a spread trade using 

the March and the April Brent Futures Contracts is a calendar 

spread; a spread trade of Singapore Fuel Oil versus SHFE’s Fuel Oil 

futures is an inter-exchange spread; and spread trade involving 

buying and selling of Singapore Fuel Oil 180 CST and Singapore 

Fuel Oil 380 CST futures contracts is an inter-commodity spread.

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