Invoice Price Affected by Hedging

In some cases, selling companies hedge the risk of index base price contracts (for example, API4 coal contracts) without any effect on the prices to the customer. The hedge position taken in the hedging operation is related to the sales despatch order, but the invoice price of the despatch order is not affected. In these cases, the hedge positions entered against the despatch order represent an actual hedge operation by the seller rather than the ability of the customer to fix prices.

However, hedging profit or loss can be included in invoicing with a contract charge. This contract charge can be configured to affect the unit price of the commodity in the invoice. See Contract and Payable Analyte Charges.

Hedging Profit or Loss in Invoicing

A sales contract can include a penalty/bonus contract charge that is based on the hedging profit or loss. This charge is included in the invoice to the customer organisation. The contract charge is calculated using the HedgingProfitOrLoss() calculated expression. See Expressions for Custom Calculations.

The contract between a producing company and a marketing company (the transfer, or linked, contract) can include a penalty/bonus contract charge to calculate the linked hedging profit and loss made by hedging the despatch orders of linked contracts. This charge is included in the invoice to the marketing company. For example, a producing company provides a commodity to a marketing company who then on-sells it to a customer organisation. A sales contract is raised for the customer organisation by the marketing company. A linked contract is raised for the marketing company by the producing company. If the marketing company hedges the despatch orders to the customer organisation, the settlement profit or loss can affect the amount charged for the commodity to the marketing company by the producing company. This amount is entered into the linked contract as a penalty/bonus contract charge. The contract charge is calculated using the LinkedHedgingProfitOrLoss() calculated expression.

Invoice Unit Price Calculation Example

A company sells copper cathodes, and partially hedges each despatch order to reduce the risk of price fluctuations. The contractual month of shipment is November.

The company buys a copper futures for three 25-t contracts on the London Metal Exchange (LME). The hedge position settles on 5 November. The strike price of the hedge for 5 November is 6412.00 USD/t. A despatch order for the November shipment is allocated to the hedge position. The despatch order is for 500 t; therefore, 75 t are hedged and the remainder is unhedged.

In November, 501.451 t of cathodes are loaded on the shipment. The LME average price for November is 5966.70 USD/t.

The copper revenue from the shipment is calculated:

Revenue from hedged quantity = 75 * 6412.00 = 480,900

Revenue from unhedged quantity = (501.451 - 75) * 5966.70 = 2,544,505.18

Total revenue = USD 3,025,405.18

Final invoice unit price = 3,025,405.18 / 501.451 = 6033.3017 USD/t