Carrying Forward or Back

The carrying forward or back operation consists of the following activities:

Evaluating a quotation period
Creating swaps contracts
Grouping related hedge positions

Example: Despatch order delivered later than planned

Note: This simplified example is based on a single swaps contract with a single despatch order allocation, and all QPs are based on full calendar months.

A 1000 t despatch order for 20 June has a quotation period (QP) of M+1. Therefore, the QP dates are 1–31 July.

The seller wants to reduce the risk by fixing a price; for example, 5000 USD/t. The seller creates a swaps contract for 1000 t, with a fixed (sell) leg at 5000 USD/t and average (buy) leg for July. The allocated quantity from the despatch order is the full amount; that is, 1000 t.

The hedge summary for July displays:

Net Hedge Position = 1000 t (Buy)
Despatch Order / Quota Quantity = 1000 t
Allocated Quantity = 1000 t
Hedged Percentage = 100%

However, the despatch order is delivered on 2 July. Because the QP is M+1, the QP dates are changed to 1–31 August.

The updated hedge summary for July displays:

Net Hedge Position = 1000 t (Buy)
Despatch Order / Quota Quantity = 0 t
Allocated Quantity = 1000 t
Hedged Percentage = Value cannot be determined

The seller has overhedged for July and underhedged for August. The seller creates a sell hedge position for July for 1000 t to cancel out the net hedge position, and creates a buy hedge position for August for 1000 t instead. These two transactions can be done together by carrying the July hedge position forward to August.

1. Evaluating a quotation period

To evaluate a quotation period, a search is done based on a commodity, district and month.

The search results include only locked hedge positions that have a selectable (or no) status:

Futures contracts with a maturity date in the original period
Swaps contracts with a quotation period on an average leg that matches the original period

Options contracts are excluded from the search results because options contracts can be withdrawn, sold or left to expire if they are no longer required or financially favourable.

Spread contracts are also excluded from the search results.

The hedging summary is used to make a decision whether to carry hedge positions forward or back. The summary includes the following information for the locked hedge positions that have a selectable (or no) status and are returned from the search:

Net Hedge Position—Difference between the sum of the negative hedge position quantities and the sum of the positive hedge position quantities
Despatch Order / Quota Quantity—Difference between the sum of the actual quantities from the sales despatch orders or quotas and the purchase despatch orders or quotas, where the quantity is priced with a QP that matches the search date range
Allocated Quantity—Sum of the allocated despatch order and quota quantities
Hedged Percentage—The allocated quantity divided by the despatch order / quota quantity multiplied by 100

If the hedge ratio is more than 100%, the period being evaluated is overhedged.

2. Creating swaps contracts

To carry hedge positions forward or back, average/average swaps contracts are created:

One leg has a quotation period that matches the original period.
One leg has a quotation period that matches the target period.

If the hedging summary shows a net position with (Buy) after the quantity, the leg for the original QP should be a sell position. The effect is to cancel out the quantity in the original period, and replace it with the same quantity in the target period.

Multiple swaps contracts can be created in the carry forward or back operation.

The quantity to carry must equal the total quantity of the new swaps contracts.

3. Grouping related hedge positions

MineMarket creates hedge action groups as required.

The new swaps contracts are grouped with the existing hedge positions on a pro-rata basis. New swaps contracts may be split if they are for a multiple number of contracts for the market commodity.

Note: The following simplified examples are based on a market commodity with a market contract quantity of 25 t.

Grouping Example 1: Single new swaps contract allocated across two existing hedge positions

Swap1 and Swap2 are selected in an original period of July:

Swap1 is for 200 t (8 contracts)—This is 67% of the total 300 t.
Swap2 is for 100 t (4 contracts)—This is 33% of the total 300 t.

NewSwap1 is created for 100 t (4 contracts) for a target period of August.

Ideally this quantity would be divided across the two existing swaps in the 67/33 ratio. However, the new quantities must be multiples of 25 t. MineMarket assigns 2 contracts to Swap1 because 50 is the largest multiple of 25 that is less than 67. The remaining 2 contracts are assigned to Swap2 because that is the last hedge position selected for the carry forward operation.

The final grouping is:

Group1—Swap1 and NewSwap1A (50 t)
Group2—Swap2 and NewSwap1B (50 t)

Grouping Example 2: Single new swaps contract allocated to one existing hedge position

Swap1 and Swap2 are selected in an original period of July:

Swap1 is for 200 t (8 contracts)—This is 67% of the total 300 t.
Swap2 is for 100 t (4 contracts)—This is 33% of the total 300 t.

NewSwap1 is created for 25 t (1 contract) for a target period of August.

Ideally this new quantity or 25 t would be divided across the two existing swaps in the 67/33 ratio, which would be equivalent to a 17/8 split. However, NewSwap1 has only a single contract and cannot be split. Size is not considered when there is only a single contract. The contract is assigned to Swap1 because that is the first hedge position selected for the carry forward operation.

The final grouping is:

Group1—Swap1 and NewSwap1

Grouping Example 3: Two new swaps contracts allocated across three existing hedge positions

Swap1, Swap2 and Future1 are selected in an original period of July:

Swap1 is for 200 t (8 contracts)—This is 50% of the total 400 t.
Swap2 is for 150 t (6 contracts)—This is 37.5% of the total 400 t.
Future1 is for 50 t (2 contracts)—This is 12.5% of the total 400 t.

Two new swaps contracts are created for a target period of August:

NewSwap1 is for 100 t (4 contracts).
NewSwap2 is for 50 t (2 contracts).

Ideally this new quantity of 150 t would be divided across the three existing positions in the 50/37.5/12.5 ratio, which would be equivalent to a 75/56/19 split. However, each new swaps contract is considered individually, and the new quantities must be multiples of 25 t.

The final grouping is:

Group1—Swap1 and NewSwap1A (50 t)
Group2—Swap2 and NewSwap1B (25 t)
Group3—Future1 and NewSwap1C (25 t)
Group4—Swap1 and NewSwap2A (25 t)
Group5—Swap2 and NewSwap2B (25 t)