FEPs & RISK CURVES
Figure 3: Risk Curves & FEP For Basis Swap Houston Ship Channel Basis Swap
Reference Basis Fixed Price
Difference between first of month Inside FERC’s Houston Ship Channel Index and NYMEX (Henry Hub) settlement for corresponding contract month
$0.15 per MMBtu per month
Calculation Period Monthly Notional Quantity Swap Term
Floating Amount Fixed Amount
20,000,000 MMBtu/month
January 1 to December 31, 2013 Floating Price * Notional Quantity Fixed Price * Notional Quantity
Source: NQuantX Global Commodity Workbench
C) Basis Swaps For swaps where the underlying is the difference
between to commodity prices such as calendar spreads, location basis or product differentials, the FEP are calculated for each leg of the swap separately. The reason is that a basis swap can be decomposed into two fixed-for-floating swaps corresponding to each leg of the swap (Figure 3).
D) Options on Swaps (Swaptions) Options are generally defined as swaps under
DF, but the final CFTC rule includes a “trade option exemption” if the option buyer and seller meet certain eligibility requirements, including that the option, if exercised, be physically settled, and that the option buyer be a commercial user of the commodity underlying the option contract. Commodity options used by commercial entities to deliver and/or receive physical commodities in connection with their business are generally exempt from mandatory clearing. The FEP and risk curves for options are calculated
based on the option delta. FEP reports for options need to include the notional volume (non-delta adjusted position) as well as the delta-adjusted position. The delta adjusted swaption position is calculated as the option delta times the notional
Figure 4: Strip of Monthly Swaptions Strip of NYMEX Natural Gas Swaptions
Reference Price Strike
NYMEX (Henry Hub) prompt $2.50 per MMBtu per month
Calculation Period Monthly Notional Quantity Option Expirations Option Type
2,500,000 MMBtu/month Last day of pricing month Call
Source: NQuantX Global Commodity Workbench
volume. As the underlying market changes over time, the delta adjusted position needs to be updated.
FME Positions & Other Single
Exposure Metrics Single exposure metrics attempt to summarize
the exposure to each forward curve using a single point. A commonly used metric is a ‘scalar’ hedge ratio, which is calculated in a similar fashion as the hedge ratios for each point in the curve, but assuming that the full curve moves in a parallel fashion. As it is well known, the behaviour of forward
prices is not uniform across the curve. As a general rule, the long end of the curve tends to be considerably more stable than the short end of the curve. Therefore, a sensitivity metric based on a parallel move in the curve is not particularly meaningful and traders can easily find ways to ‘hide’ large exposures to changes in the forward curve by taking time spreads and other strategies. A more sophisticated approach is to use FMEs
which are a way to summarize exposures to each forward curve in a single price, which is often the ‘front’ or ‘prompt’ month contract. The main idea is that we can approximate changes in the value of
Swaption Delta-Adjusted Swaption Non-delta Adjusted Position
100 150 200 250
50 0 Jan Feb Mar Apr Ma Jun y Jul Aug Sep NYMEX NG Futures Contract 86 June 2012 Oct Nov Dec
1,000 1,500 2,000 2,500
500
-2,500 -2,000 -1,500 -1,000 -500 0
Jan Feb Mar Apr Ma Jun y Jul Aug Sep Futures Reference Month Oct Nov Dec
Houston Ship Channel
Henry Hub
Hedge Curve (Risk Curves) Futures Equivalent Position (FEP)
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96