Hedging Valuations and Settlements

• Hedging Valuations and Settlements
• • Valuations
  • Settlements
  • Valuations and Settlements from Hedge Revaluations

The aim of a valuation or settlement is to determine the margin price of a hedge position; and therefore, the profit or loss for the hedge.

A valuation is provisional and a settlement is final.

Valuations for options contracts also provide information needed to make a decision about whether to execute or withdraw the options contract.

The settlement process for foreign exchange (FX) hedge positions (which are for currency commodities) is the same as the settlement process for hedge positions for physical commodities.

Valuations

If actual prices are not available, valuations are calculated using the related forward price series (if forward prices are available). See Price Series. If some actual prices are available, a combination of actual and forward prices is used.

Example: The current date is 5 May. Actual prices are available up to and including for 4 May, and forward prices are available from 5 May. For valuations created today with a quotation period (QP) based on the average price of the month of the maturity date:

• A hedge position that matured on 30 April has a settlement based on April's actual prices.
• A hedge position that matures on 31 May has a valuation based on a combination of actual and forward prices:

  ( Average of AP 1-4 May * NAP ) + ( Average of FP 5-31 May * NFP ) / ( NAP + NFP )

  Where:

  • AP = actual prices
  • NAP = number of actual prices
  • FP = forward prices
  • NFP = number of forward prices

  The entry frequency of the prices might not be the same; for example, daily actual prices but monthly forward prices. In that case, NFP must be the number of days for which forward prices would be entered if it were also a daily price series.

• A hedge position that matures on 30 June has a valuation based on June's forward prices.

When valuing FX hedge positions, if actual exchange rates are available, valuations are calculated using forward exchange rates (if exchange rate forward curve series are available). Actual and forward exchange rates are not combined. If the whole QP cannot be calculated from actual exchange rates, the whole QP is estimated using forward exchange rates.

Settlements

When all required actual prices exist to calculate the exercise price and the market price, a final settlement can be calculated for the hedge position.

For futures, spread and swaps contracts, a settlement can only be created on or after the maturity date.

For options contracts, whether a settlement can be created before the declaration date depends on the options execution setting in the settlement method.

Executing or withdrawing an options contract also creates a settlement for the hedge position.

Valuations and Settlements from Hedge Revaluations

Hedge revaluations are a type of intelligent report within MineMarket. A hedge revaluation stream sets the default parameters for the hedge revaluations in the stream. A hedge revaluation creates valuations and settlements for all hedge positions that match the parameters of the hedge revaluation and do not yet have a final settlement.

Valuations and settlements created by a hedge revaluation display on the Hedging Explorer. However, these valuations and settlements can only be deleted (cleared) via the hedge revaluation.

The creation of valuations and settlements can be automated if hedge revaluations are run on a schedule.

See Hedge Revaluation for more information.