(FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
(FIN 301) Understanding Contango & Backwardation in Oil Trading
Strategies with Complete Solutions
🔑 What an Oil Broker Does
An oil broker is like a middleman.
• They don’t take risk themselves (most of the time).
• Instead, they match buyers and sellers (oil companies, refiners, hedge funds, trading houses,
banks) who want to trade oil contracts.
• The broker earns a fee/commission on each deal.
Swap Desk (Oil Swaps)
A swap in oil is a financial contract – no barrels of oil usually change hands.
• Two parties exchange cash flows based on the price of oil.
• Example:
o Company A wants to lock in a fixed price of $80/barrel because they fear oil prices
will rise.
o Hedge Fund B is happy to pay floating market prices and receive $80 fixed, betting
oil prices will fall.
• The broker connects them and arranges the swap.
• 👉 Why it matters:
o Swaps help companies hedge (protect) against price risk.
o Traders/speculators use swaps to bet on oil prices without buying the physical oil.
Forward Desk (Oil Forwards)
A forward is a deal to buy or sell oil in the future at a set price today.
• Example:
o Today is January. A refiner agrees to buy 1 million barrels for delivery in June at
$75/barrel.
o The seller locks in that price and knows their revenue in advance.
• Forwards can be:
o Physical (actual oil delivered later)
o Financial (cash settled, no delivery, just the difference in price paid)
• 👉 Why it matters:
o Forwards give price certainty to both sides.
o They are the simplest type of “derivative” in oil trading.
Difference Between Swaps & Forwards
• Forward → One future transaction at an agreed price.
• Swap → A series of exchanges (like “fixed vs floating” prices over time).
Think of it like this:
(FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
, (FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
• Forward = “We agree today, you deliver oil in 6 months.”
• Swap = “I’ll pay you $80/barrel fixed every month, you pay me whatever the market is — we
swap the difference.”
👨💼 What He Would See in the Internship
On the swap & forward desk of an oil broker, you would likely:
• Sit on the phones/chats while brokers connect buyers (oil companies, airlines, refiners) with
sellers (traders, banks, hedge funds).
• See price negotiations — e.g. “3-way call: Buyer wants a Brent swap at $82, Seller wants
$83, broker finds the middle ground.”
• Learn the lingo: spreads (difference between contracts), benchmarks (Brent, WTI, Dubai),
and calendars (1-month forward, 3-month swap, etc.).
• Enter deals into the system after trades are agreed.
✅ In short:
An oil broker swap & forward desk is where clients hedge or speculate on oil prices for the future.
Forwards are one-off agreements to buy/sell later. Swaps are cash-flow contracts where one side
pays a fixed price and the other pays the floating market price. Brokers make money by connecting
the two sides and charging a fee.
(FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
Solutions
(FIN 301) Understanding Contango & Backwardation in Oil Trading
Strategies with Complete Solutions
🔑 What an Oil Broker Does
An oil broker is like a middleman.
• They don’t take risk themselves (most of the time).
• Instead, they match buyers and sellers (oil companies, refiners, hedge funds, trading houses,
banks) who want to trade oil contracts.
• The broker earns a fee/commission on each deal.
Swap Desk (Oil Swaps)
A swap in oil is a financial contract – no barrels of oil usually change hands.
• Two parties exchange cash flows based on the price of oil.
• Example:
o Company A wants to lock in a fixed price of $80/barrel because they fear oil prices
will rise.
o Hedge Fund B is happy to pay floating market prices and receive $80 fixed, betting
oil prices will fall.
• The broker connects them and arranges the swap.
• 👉 Why it matters:
o Swaps help companies hedge (protect) against price risk.
o Traders/speculators use swaps to bet on oil prices without buying the physical oil.
Forward Desk (Oil Forwards)
A forward is a deal to buy or sell oil in the future at a set price today.
• Example:
o Today is January. A refiner agrees to buy 1 million barrels for delivery in June at
$75/barrel.
o The seller locks in that price and knows their revenue in advance.
• Forwards can be:
o Physical (actual oil delivered later)
o Financial (cash settled, no delivery, just the difference in price paid)
• 👉 Why it matters:
o Forwards give price certainty to both sides.
o They are the simplest type of “derivative” in oil trading.
Difference Between Swaps & Forwards
• Forward → One future transaction at an agreed price.
• Swap → A series of exchanges (like “fixed vs floating” prices over time).
Think of it like this:
(FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
, (FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
• Forward = “We agree today, you deliver oil in 6 months.”
• Swap = “I’ll pay you $80/barrel fixed every month, you pay me whatever the market is — we
swap the difference.”
👨💼 What He Would See in the Internship
On the swap & forward desk of an oil broker, you would likely:
• Sit on the phones/chats while brokers connect buyers (oil companies, airlines, refiners) with
sellers (traders, banks, hedge funds).
• See price negotiations — e.g. “3-way call: Buyer wants a Brent swap at $82, Seller wants
$83, broker finds the middle ground.”
• Learn the lingo: spreads (difference between contracts), benchmarks (Brent, WTI, Dubai),
and calendars (1-month forward, 3-month swap, etc.).
• Enter deals into the system after trades are agreed.
✅ In short:
An oil broker swap & forward desk is where clients hedge or speculate on oil prices for the future.
Forwards are one-off agreements to buy/sell later. Swaps are cash-flow contracts where one side
pays a fixed price and the other pays the floating market price. Brokers make money by connecting
the two sides and charging a fee.
(FIN 301) Understanding Contango & Backwardation in Oil Trading Strategies with Complete
Solutions
