CLAUSES CAN PROVE USEFUL IN SITUATIONS WHERE ONE PARTY NEEDS SOME FLEXIBILITY WHILST THE OTHER APPRECIATES A HIGHER PHYSICAL PREMIUM...


 Back-Pricing allows one party to choose the QP month from a range of choices but, unlike Calendar Spread Optionality, the back pricing QP choice can be made once the market prices are known.


For a merchant, who can face uncertainty over the timing of their physical purchases and sales or their shipping schedules, back-pricing allows them to re-match their hedge books to their physical exposures in case their schedule changes.


 on a physical contract, typically a more attractive physical premium.


For example, the following table shows a 6 month physical contract for Jan-June 2019, where the buyer can choose the QP for each Shipment Month “M”, being the buyer’s choice of either M, M+1 or M+2, with the QP decided at the end of M+1.


E.g. for the Jan 2019 shipment, the buyer can choose the LME price during January, February or March 2019, with the choice made at the end of February 2019. If the sales or shipping schedule changes, the buyer can adjust their hedge book accordingly and maintain their operating margin.


Table 3


MONTH OF SHIPMENT POSSIBLE QPS MONTH M JAN 19 FEB 19


QP M


Jan 19 Feb 19


MAR 19 APR 19 MAY 19 JUN 19 JUL 19 AUG 19 SEP 19 OCT 19 


Mar 19 Apr 19 May 19 Jun 19 Jul 19


Aug 19 Sep 19 Oct 19 Nov 19


Source: ADM Investor Services International Limited


 premium. For example, a copper seller normally receiving LME +$80/Mt might expect to 


Not all metals contracts contain these clauses, although some may contain more than one,  other appreciates a higher physical premium.


If that situation exists in other commodity markets, then the same tools may be applicable?


Rohan Ziegelaar E: metals.desk@admisi.com T: +44(0) 20 7716 8081


QP M+1 Feb 19 Mar 19


Apr 19 May 19 Jun 19 Jul 19


Aug 19 Sep 19 Oct 19 Nov 19 Dec 19


QP M+2 Mar 19 Apr 19


May 19 Jun 19 Jul 19


Aug 19 Sep 19 Oct 19 Nov 19 Dec 19 Jan 20


END OF M+1 QP declaration 28 Feb 19 


        


19 | ADMISI - The Ghost In The Machine | January/February 2019


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