Hedging Profit or Loss
The profit or loss for a hedge position is calculated:
Profit/Loss = ( Net Margin Price * Allocated Quantity ) - Broker Fee
If an interest rate is specified for the market commodity, the valuation or settlement also displays the net present value (NPV) of the profit or loss. The NPV is a calculation of how much money would need to be invested today at the available interest rate to generate the same return. For futures, spread and swaps contracts, the calculation is based on days to maturity. For options contracts, the calculation is based on days to declaration. For more information, see https://hbr.org/2014/11/a-refresher-on-net-present-value.
Example of Profit or Loss by Allocated Despatch Order
The following example has the quantities from two despatch orders (DOs) allocated across three buy futures contracts.
- DO1 has a total quantity of 70,000 tonnes. 50,000 tonnes are hedged across hedge position (HPs) 1, 2 and 3.
- DO2 has a total quantity of 20,000 tonnes. 10,000 tonnes are hedged across HP1 and HP3.
Broker fees are not included in this example.
|
Hedge Position |
Despatch Order Allocation |
Settlement (USD) |
|---|---|---|
|
HP1 = 10,000 t Market Price = 101 Exercise Price = 99 |
DO1 = 5000 t DO2 = 5000 t |
Margin Price = 99 – 101 = -2 P/L = 10,000 * -2 = -20,000 |
|
HP2 = 20,000 t Market Price = 100 Exercise Price = 105 |
DO1 = 20,000 t |
Margin Price = 105 – 100 = 5 P/L = 20,000 * 5 = 100,000 |
|
HP3 = 30,000 t Market Price = 99 Exercise Price = 98 |
DO1 = 25,000 t DO2 = 5000 t |
Margin Price = 98 – 99 = -1 P/L = 30,000 * -1 = -30,000 |
The hedged profit or loss per despatch order is calculated:
P/L of DO1 = ( 5000 * -2 ) + ( 20,000 * 5 ) + ( 25,000 * -1 ) = USD 65,000
P/L of DO2 = ( 5000 * -2 ) + ( 5000 * -1 ) = USD -15,000
The profit or loss is stored against the hedge position as the hedged profit or loss. After hedge positions are valued, the valuation or settlement can be locked. The valuation process cannot be run again on a hedge position with a locked valuation or settlement.
Journal Creation for Hedged Profit or Loss Amounts
If the chart of accounts includes accounts for the Hedging and FX Hedging document types, journal entries can be created for profit or loss amounts. See Charts of Accounts.
The available concepts are:
- Valuation Total Profit
- Valuation Total Loss
- Valuation Net Profit
- Valuation Net Loss
- Valuation Total Premium
Valuation Net Profit, Valuation Net Loss and Valuation Total Premium should only be used with accounts applicable to options contracts.
The profit or loss is calculated in the valuation or settlement of the hedge position. These valuations or settlements may also be created with the Hedge Revaluation intelligent report.
The journal transaction type is Accrual for valuations and Standard for settlements. The valuation or settlement must be locked before journals can be created.
Journal Entries in Multiple Currencies
If the relevant account in the chart of accounts has:
- Both a primary and a secondary currency defined, the Debits and Credits fields display for both currencies in the journal entry
- Store Original Currency checked, the Debits and Credits fields display for the original currency as well as the primary and secondary currencies if applicable
If debits and credits display for multiple currencies, the exchange rates also display.
Journal Explorer
The Journal Explorer can be used to view journals and their journal entries. Multiple journals can also be locked or unlocked.
