FEPs & RISK CURVES
to the relevant futures equivalent months as per the specifications of the swap transaction. In the next step, the quantity apportioned to each future contract is divided by the contract size to calculate the number of future equivalent contracts for each applicable futures month. If a swap has
time as the cash market transactions in that price series. Even though the futures contracts expire before the start of the delivery month, the futures price for a given month is an unbiased estimator of the average spot price during the delivery period in the future.
Figure 1: Risk Curve & CFTC FEP, NYMEX WTI Swap W ith Monthly Settlements
Reference Price Fixed Price
Floating Price Notional
Settlements Type
Swap Term
Fixed for Floating NYMEX WTI Crude Oil Swap NYMEX WTI prompt
$105.00 per barrel Average WTI prompt 100,000 bbls/month Monthly Financial
Six full months from January 1 to June 30 Source: NQuantX Global Commodity Workbench
exposure to futures contracts that are not yet listed on the exchange (e.g. several years in the future) the equivalent futures position should show the exposure to those futures prices. The main terms and the risk curves and CFTC’s
FEPs for a OTC swap linked to the NYMEX WTI futures contract are shown in Figure 1. The small differences between the risk curves and
FEPs are mainly due to the use of calendar days instead of actual trading days in the CFTC method, which can introduce significant sources of error in hedge reports as the contract positions will differ.
B) Swaps Not Linked to a DCM Contract Many OTC energy and commodity swaps are
not priced directly off a futures contract. The cash market surveys used in these cases usually consist of spot or short-term forward prices. The general rule for these OTC swaps is that when
the pricing for the floating leg is based on a spot or short term forward price, the FEP should be based on the futures contract that will deliver at the same
100 120
20 40 60 80
0 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Futures Contract For example, a swap priced using a value of
a gasoline spot market price on September 15, 2012 would be converted to September futures equivalent position, even though the September contract settles at the end of August. This swap would result in futures equivalent positions in the September contract despite the fact that it will not be possible to actually hold open futures positions in this contract beyond the settlement date. In Figure 2, we can see the significant differences
between the RiskCurves and the Futures Equivalent Position following the methodology outlined by the CFTC. Even though the swap settles on a quarterly basis, the economic exposures are similar to the monthly swap, as spot quotes for the full quarter are used to calculate the average. For example, for the first quarter, the real economic exposure of this swap is to January, February and March futures contracts, while the April exposure for regulatory reporting is not particularly representative of the actual market risk of the swap (see Figure 2).
Figure 2: Risk Curve & CFTC FEP, of a Q1-Q2 Heating Oil Spot Swap
Fixed Price
Fixed for Floating NY RBOB Calendar Swap Futures $2.65 per gallon.
Floating Price Notional
Settlements Type
Swap Term
Average New York RBOB (Barge) spot 84 million gallons/quarter Quarterly Financial
Six full months from January 1 to June 30 Source: NQuantX Global Commodity Workbench
1,000 1,500 2,000 2,500
500 0 Jan Feb Mar Apr May Futures Contract June 2012 85 Jun Jul CFTC FEP Risk Curve Jul-12 Aug-12 CFTC FEP Risk Curve
Futures Equivalent Position (FEP)
Futures Equivalent Position (FEP)
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