Risks & Hedging Techniques for Swing Contracts
15 Feb 08
Author: John Breslin, Les Clewlow, Chris Strickland, Daniel van der Zee

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The main features of swing contracts which make them difficult to value and risk manage are the constraints on the quantity of, for example, gas which can be taken. The main constraint is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the defined contract price (which may depend on other market indices), at the end of the year (or penalty date), regardless of the actual quantity of gas taken. Typically, there is also a maximum annual quantity which can be taken.