Hedge Positions

(Physical Commodity) Hedge Positions

A hedge position is an order given to a broker or counter-party to buy or sell a number of contracts in a physical commodity market. After a broker has executed a trading order in the market, and the order has been successfully filled, a hedge position is recorded in MineMarket against the order for the corresponding party (the owner of the order).

Four hedge position contract types can be created and managed in MineMarket:

  1. Futures
  2. Options
  3. Spread
  4. Swaps

In the MineMarket user interface, hedge positions are also called 'hedge actions'.

Allocation of Despatch Orders, Quotas, QP Lines and Repurchase Actions

For physical commodities, despatch orders, quotas, quotation pricing (QP) lines (in a despatch order or quota) and repurchase actions can be allocated to single hedge positions.

A despatch order, quota, QP line or repurchase action is hedged when it is allocated to one or more hedge positions.

Despatch orders or quotas of a corresponding physical commodity are allocated to a hedge position to tie them to upcoming demands or deliveries. A despatch order or quota corresponds to the commodity when the contract pricing is:

  • Product pricing—The contract's material corresponds to a material associated with the commodity of the hedge position.
  • Analyte pricing—The analyte associated with the commodity of the hedge position is one of the payable analytes in the contract.

Repurchase actions can only be hedged with futures and options contracts.

Hedging allows for multiple deliveries, so that multiple despatch orders or quotas can be associated with one hedge position. One despatch order or quota can also be allocated to multiple hedge positions, as long as there is enough material remaining to be allocated from the required quantity as defined in the despatch order or quota. The quantity defaults to the unhedged quantity of the despatch order or quota, or to the remaining quantity in the hedge position, whichever is the lower.

By default, the sign of the Allocated Quantity matches the sign of the Quantity of the hedge position. That is:

  • Positive for futures contracts and the legs of spread or swaps contracts with a Transaction Type of Buy
  • Negative for futures contracts and the legs of spread or swaps contracts with a Transaction Type of Sell
  • Positive for bought call options and sold put options
  • Negative for sold call options and bought put options

Only positive quantities can be entered: MineMarket converts the quantity to a negative value as required. However, the sign of the allocation can be inverted from the default if required.

FX Hedge Positions

A foreign exchange (FX) hedge position is an order given to a broker or counter-party to buy or sell a number of contracts in a currency commodity market.

Three FX hedge position contract types can be created and managed in MineMarket:

  1. Futures
  2. Spread
  3. Swaps
Allocation of Invoice Instalments in Despatch Order Snapshots

For currency commodities, invoice instalments in despatch order snapshots can be allocated to single hedge positions. The invoice previews within the snapshots are calculated by the MineMarket Marketing Service. See Despatch Order Snapshots.

  • For revenue snapshots, only instalments in snapshots that are specific to an invoice type can be hedged. (The default snapshot's invoice preview does not display.) The Create Snapshot Per Invoice Type setting in the snapshot settings must be enabled for this functionality. See Specify Snapshot Settings.
  • For cost snapshots, each instalment for each cost line from the default snapshot's invoice preview can be hedged. The Calculate Costs setting in the snapshot settings must be enabled for this functionality.

An invoice instalment from a despatch order snapshot is hedged when it is allocated to one or more FX hedge positions. An invoice instalment corresponds to the commodity when the primary currency of the invoice corresponds to the contract UOM of the market commodity.

Multiple invoice instalments can be associated with one FX hedge position. One invoice instalment can also be allocated to multiple FX hedge positions, as long as there is enough quantity (currency) remaining to be allocated from the invoice instalment. The quantity defaults to the unhedged quantity of the invoice instalment, or to the remaining quantity in the FX hedge position, whichever is the lower.

By default, the sign of the Allocated Quantity matches the sign of the Quantity of the hedge position. That is:

  • Positive for futures, spread or swaps contracts with a Transaction Type of Buy
  • Negative for futures, spread or swaps contracts with a Transaction Type of Sell

Only positive quantities can be entered: MineMarket converts the quantity to a negative value as required. However, the sign of the allocation can be inverted from the default if required.

Hedge Position Prices

When a hedge position is created, various prices are entered, including information for the calculation of future prices. These prices are used in settlement calculations.

Futures Contracts

Futures contracts are an agreement to buy or sell a fixed amount of material or currency for delivery on a fixed future date at a price agreed today. When the contract matures, the futures contract must be settled.

There are two transaction types for futures contracts:

  1. Buy (also called a long position)
  2. Sell (also called a short position)

The settlement of a futures contract is based on the exercise price, the market price and an optional premium:

  • Exercise Price—The amount of money paid (for a buy transaction) or received (for a sell transaction) at the maturity date. The exercise price may be fixed (the strike price) or the average of the prices in the price series over the quotation period.
  • Market Price—The underlying value of the hedge position, based on the price in the price series at the maturity date.
  • Premium—The amount of money paid to buy the futures contract.

    The premium is quoted as a price per quantity of product; for example, 3 USD per troy ounce for silver, and may be a positive or negative number.

There may also be a broker fee.

Options Contracts

Options contracts give the buyer of the contract the right but not the obligation to buy or sell a futures contract at a set price. The buyer pays a premium for this right. Depending on the settlement method, the options contract can be executed on or before the declaration date. However, an options contract can also be withdrawn before the declaration date, or can be left to expire.

Underlying an options contract is an assumed futures contract. If the options contract is executed, MineMarket creates the underlying futures contract. The maturity date of the options contract is really the maturity date of this futures contract.

Whether the options contract is being bought or sold is the transaction type.

There are two option types:

  1. Call option—The buyer of the options contract has the right to buy the commodity.
  2. Put option—The buyer of the options contract has the right to sell the commodity.

The settlement of an options contract is based on the exercise price, the market price and the premium:

  • Exercise Price—The strike price, which is the predetermined (fixed) amount of money paid (for a buy transaction) or received (for a sell transaction) if the options contract is executed.
  • Market Price—The underlying value of the options contract, which is the average of the prices in the price series over the quotation period. The final market price is calculated when the options contract is executed.
  • Premium—The amount of money paid to buy the right to the options contract. The premium must be paid, even if the options contract is withdrawn.

    The premium is quoted as a price per quantity of product; for example, 3 USD per troy ounce for silver, and may be a positive or negative number. For a call option, the premium is big if the strike price is less than the spot price. (The spot price is the normal open market price to buy the commodity.) The premium approaches zero for strike prices that are larger than the spot price. For a put option, the premium is big if the strike price is greater than the spot price.

There may also be a broker fee, which must be paid, even if the options contract is withdrawn.

Options contracts can also be traded before they expire. The settlement calculations of an options contract also include an estimation of the contract's current pricing.

Options contracts are not applicable in MineMarket for currency commodities.

Spread Contracts

A spread contract is a related pair of hedge positions, each of which is a futures contract with a fixed price. These related hedge positions are called 'legs'. One is a buy leg and one is a sell leg.

The two legs can have different maturity dates. However, they must be in the same market and for the same commodity.

The settlement of a spread contract is based on the exercise price and the market price in each leg:

  • Exercise Price—The strike price, which is the amount of money paid (for a buy transaction) or received (for a sell transaction) at the maturity date.
  • Market Price—The underlying value of the spread contract, based on the price in the price series at the maturity date.
Swaps Contracts

A swaps contract is a related pair of hedge positions, each with a single price. These related hedge positions are called 'legs'. One is a buy leg and one is a sell leg. The prices may both be based on the average of a price series over a quotation period, or (more typically) one average and one fixed price. When the contract matures, the swaps contract must be settled.

By default:

  • If the transaction type of the market commodity is Buy, the buy leg (the long position) has a fixed price and the sell leg (the short position) has a price based on a price series and quotation period.
  • If the transaction type of the market commodity is Sell, the sell leg (the short position) has a fixed price and the buy leg (the long position) has a price based on a price series and quotation period.

The settlement of a swaps contract is based on the two prices.

There may also be a broker fee.

Swaps contracts with both legs based on a price series and quotation period (average/average swaps contracts) are created when carrying hedge positions forward or back.