A commodity swap which allows a refiner to hedge against a narrowing spread between crude oil prices and the prices of its refined products. Therefore, the right to profit from a potential widening of the spread is given up. This swap can effectively lock in a margin (known as a crack spread) by paying the floating price of a refined oil product and receiving the floating price of a crude oil input plus the crack spread. The crack spread swap allows, also, a refiner to pay a fixed crack spread and receive a floating margin to that spread. By this, the refiner can be protect its refining margin against unfavorable market changes.
The crack spread swap is also known as a refinery margin swap or simply as a crack swap.
