Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
Converting Swap to Futures

Converting Swap to Futures

Ratings: (0)|Views: 22|Likes:
Published by Jasvinder Josen
ICE was the first to initiate converting commodity swaps to futures in August 2012. The conversion took place in October 2012. This article explains the technicals involved in covering a swap into a future and how they are similar and not so similar.
This article appeared in The Edge, Malaysia on Sept 10, 2012.
ICE was the first to initiate converting commodity swaps to futures in August 2012. The conversion took place in October 2012. This article explains the technicals involved in covering a swap into a future and how they are similar and not so similar.
This article appeared in The Edge, Malaysia on Sept 10, 2012.

More info:

Published by: Jasvinder Josen on Apr 02, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as DOCX, PDF, TXT or read online from Scribd
See more
See less

07/09/2013

pdf

text

original

 
Converting Swaps into Futures
“Regulators win as ICE converts swaps to futures” –
read the Thompson Reuters
Westlaw’s
headline on Aug 6. The Intercontinental Exchange (ICE) had announcedthat all its over-the-counter (OTC) cleared energy swaps would be converted tofutures contracts from January 2013.
A “cleared swap” is a term introduced in 2009 as
part of an effort to standardise theOTC derivatives in order to bring them on to exchanges, and be subjected to mark-to-market and margining rules. Cleared swaps are swaps that are traded and settledwith the exchanges. Hence, when a party enters a cleared swap, the other side of the trade is the Exchange.Once a standardised swap trades on the exchange, they quite resemble futures. Inthis article, I show how a swap can be converted into futures. The trade is chosenfrom one of the trades published by the CFTC (the U.S. Commodity Futures TradingCommission) in the U.S. Federal Register in Nov 2010.
The Swap
We have a fixed for floating WTI (West Texas Intermediate) Crude Oil swap withfeatures shown in
Table 1
. This swap will have cash flows as shown in
Chart 1
, withParty A paying a fixed rate of $80 per barrel for 100,000 barrels every month andreceiving the floating rate for 100,000 barrels each month. The floating rate is thesettlement rate of the one-month futures expiring on the 22
nd
of the precedingmonth.
Table 1
Notional Quantity 100,000 barrels a monthFixed Price $80 per barrelFloating PriceDaily official next to expire price for the NYMEX WTILight Sweet Crude Oil FuturesCalculation period One month (i.e. floating rate is re-set once a month)Settlement type CashSwap term Six months (Jan 1 to 31 June)
Chart 1 : Fixed Floating WTI Crude Oil Swap
 
 The floating rate for Jan 31 is fixed at the start of the swap. The floating rate for Feb28 will be the settlement (spot) rate determined from the expiry of the Jan 2012futures contracts. For Mar 31, the floating rate will be the settlement (spot) ratedetermined from the expiry of the Feb 2012 futures contracts. And so on.
Chart 2
 illustrates the swap payments in a time line.
Chart 2: Timeline for the Fixing and Paying of the floating rates in the swap
 
Chart 3
shows a hypothetical example of the projected fixed and floating prices forthe swap as at Jan 1. The projected cash flow is used to value the swap in the booksof the parties. The floating rates are estimated from the referenced one-monthfutures prices.
 
Chart 3: Projected Fixed and Floating Rates for the Swap as at Jan 1The Similarities between a swap and a future
The Fixed Rate Payer could also choose to enter into futures contracts instead of aswap. For example, if he wanted to hedge some monthly oil positions from Januaryto June, he could choose to enter into one-month futures contracts in January,February, March and up to June. At the end of each month, assuming the settlementis in cash, he would pay or receive the difference between the settlement (spot)price of the WTI crude oil and the price he paid for the respective one-monthfutures.Looking back at
Chart 2
, the settlement price of the futures contracts is alreadyreflected as the floating rate of the swap. The fixed price of the swap, $80, is similarto the price paid for the future.
Converting the swap into a future
Following the above, we can convert the swap into a future. This is done bymultiplying the total notional quantity of the swap (600,000 barrels) by its remainingduration (6 months or 181 days) and then dividing by the number of units that makeup one futures contract (1,000 barrels = 1 futures contract). The number of futuresequivalent contracts is then allocated pro rata to each month or fraction of a month(based upon the number of days remaining in each month) remaining on the swap.This working is shown in
Chart 4.Chart 4
 –
Converting the swap into futures

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->