Unwinding

Unwinding is the process of creating new hedge positions to cancel out hedge positions that are no longer needed.

Example: Despatch order actual quantity less than planned

Note: This 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 hedging summary for July displays:

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

However, when the despatch order is delivered, the quantity is only 900 t.

The updated hedging summary for July displays:

• Net Hedge Position = 1000 t (Buy)
• Despatch Order / Quota Quantity = 900 t
• Allocated Quantity = 1000 t
• Hedged Percentage = 111%

The seller has overhedged and needs to unwind 100 t. The seller creates a sell hedge position for July for 100 t to reduce the hedged percentage.