1. CALENDAR SPREAD OPTIONALITY Calendar spread optionality allows one party (usually the buyer, e.g. merchant or smelter) to choose the QP month from a range of choices, prior to the start of the earliest possible QP month, i.e. before any of the LME settlement prices are known. This choice can be made prior to the start of each delivery month, or prior to the start of a strip of months, i.e. at the start of a calendar year.
As mentioned, traders and processors operate on a margin, buying spot, storing/processing, then selling forward, so a contango curve is good for
With spread optionality, the buyer may have the choice of QP pricing basis month M or month M+3, declared by the end of month M-1. In a contango market, the smelter buys basis M, but will buy basis M+3 in a backwardated market, helping them preserve their operating margin.
Example table below: Table 1
MONTH OF SHIPMENT
POSSIBLE QPS
MONTH M QP M JAN 19 FEB 19
POSSIBLE QPS
Curve
Jan 19 Apr 19 contango Feb 19 May 19 backwardation
Apr 19 Jul 19 contango
MAY 19 May 19 Aug 19 contango JUN 19
Jun 19 Sep 19 contango Source: ADM Investor Services International Limited
QP declaration QP choice
Jan 19 May 19
MAR 19 Mar 19 Jun 19 backwardation 28 Feb 19 Jun 19 APR 19
Apr 19 May 19 Jun 19
NUMBER OF CLAUSES, ALLOWING MERCHANTS, SMELTERS OR PROCESSORS THE ABILITY TO MANAGE THE TIMING OF SHIPMENTS OR TO STORE AND BLEND MATERIALS WHILST TAILORING THEIR HEDGE STRATEGY ACCORDINGLY.
17 | ADMISI - The Ghost In The Machine | January/February 2019
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
