Risk Management Principles in Physical Trading
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The Oil Trader has contracted 3 fuel oil cargoes (30 kT each) Pricing periods are as follows:
• Cargo 1: Buy November average price; Sell December average price
• Cargo 2: Buy at a pre-agreed fixed price; Sell November average price
• Cargo 3: Buy November average price; Sell market price on Bill of Lading (BL) date; BL is expected in first half od December
What would be the most efficient initial portfolio hedging strategy?
Oil Trader sells Naphtha cargo based on (BL + 3) pricing. To hedge his exposure he has sold Naphtha swaps, which he intends to rateably buy back during the pricing period. What is a current position of this trader?
Is there any value in bidding for storage capacity when market is in backwardation?
Sale price of your product is negotiated as a monthly average price of the month M1 quotations. If you have an option to choose between M1 and M2 month average pricing for you purchases before the 1st of M1 what is your exposure?
The Oil Trader sells Gasoil to an end user who, for operational reasons, is asking for a fixed priced delivered contract with 30% volume tolerance. To provide such delivery the Trader will have to source the product from the spot market. How should the Trader assess the price of such deal?
The Oil Trader buys 30kT/month of diesel at a monthly average of the (M-1) quotations and sells at monthly average of M quotations. It is a 4 months contract with the first delivery month (M) in March. If the Trader were to hedge the whole contract now what additional market value would he lock in? Current swap market indications are as follows:
Diesel Swap, USD/mT
A trader has access to the storage and is able to finance product in tank at competitive rates. Storage Cost is $2 per ton/mo. Storage costs on “Pay-as-you-go” basis. Cost of Capital is 4% APR. In March Trader decides to buy gasoline on the spot market at $900/mT, put it into storage for two months and lock in profit by selling May swap at $914/mT. One month later spot market is trader at 980 USD/mT and May swap are traded 981 USD/mT (still in contango). What should a trader do?
To hedge his fuel oil sales price the Oil Trader originally sold September swap. On the 20th of September he realised that his delivery is delayed and he needs to roll his hedge position into October. Currently, spot price is 650 USD/mT, while Balance Sep and Oct are traded at 645 and 643, correspondingly. What impact such hedge roll will have on original trade?
The Oil Trader buys Jet fuel on an August monthly average basis and sells it on FOB basis based on the same reference price but with (BL +3) pricing period. Deemed BL pricing date is 10th of August. Total cargo size is 30kT. There are 20 business days in August. How much volume is under exposure?
Which pricing should you prefer from the risk management point of view if your laycan is on 28-29 of September?