Capturing Commodity Forward Trades

The first two fields of the worksheet identify the trade counterparty.

The first field identifies the trade counterparty's role. The default role is specified using Utilities > Set Default Role. However, you can change it as applicable.

You can select a legal entity of specified role from the second field provided you have setup favorite counterparties. You can also type in a character to display the favorite counterparties that start with that character. Favorite counterparties are specified using Utilities > Configure Favorite Counterparties.

Otherwise click ... to select a legal entity of specified role from the Legal Entity Chooser. You can also type [Ctrl-F] to invoke the Legal Entity Chooser, or directly enter a Legal Entity short name.

Trading book to which the trade belongs. Defualts to the book selected in the User Defaults. You can modify as applicable.

You can select a book provided you have setup favorite books Favorite books are specified using Utilities > Configure Favorite Books.

Otherwise, click ... to select a book.

The owner of the book (a processing organization) identifies your side of the trade.

Unique identification number of the trade. The trade id is automatically assigned by the system when the trade is saved.

You can load an existing trade by typing the trade id into this field and press [Enter].

You can also display the internal reference or external reference. The default trade reference to be displayed can be selected in the User Defaults.

The internal reference and external reference can be set in the Details panel of the trade worksheet.

Current status of the trade. The status is automatically assigned by the system based on the workflow configuration.

The status will change over the lifetime of the trade according to the workflow configuration and he actions performed on the trade.

Displays the broker if a broker fee is captured in the Fees panel.

You can select a template from the Template field to populate the worksheet with default values. Then modify the fields as applicable.

Enter the start date and time of the trade. The trade date defaults to the current date.

Check Current to use the current system time.

Enter the maturity date for the trade. (For most emissions trades, the settle date is equal to the allowance delivery date.)

Select the commodity reset which will drive the forward. When the reset is selected, fields specific to the reset pre-fill with the appropriate information.

This is the delivery location for storage based commodities. It is populated from the CommodityLocation domain value. The pricer recognizes the delivery location and prices the forward according to the relevant location differentials.

NOTE: The location spread of the location indicated is used to adjust the projected forward price of the commodity taken from the forward curve and will have a valuation impact on the trade. Changing the delivery location has a pricing impact but does not have an impact on the fixed price of the forward, which is a saved trade attribute.

Select the direction of the trade.

The quantity of the certificate in commodity units.

Unit of measure that the quantity represents. You can use a different unit type than the unit in the product definition. The quantity unit defaults to the unit defined in the commodity definition.

If a unit other than the default unit is chosen, the application requires a conversion definition to correctly convert the units for the cashflows. Commodity positions are always kept in the default unit in the Position Keeper. To define the conversion definition, from Calypso Navigator, choose Configuration > Commodities > Commodity Conversion.

The Forward Price is automatically displayed based on the commodity reset that has been chosen.

Calypso out-of-the-box provides the following forward price methods:

Nearby — The Nearby (aka Prompt) future is the future in a given contract listing which is closest to expiration on a specified date. This future is typically the most liquid and contains the highest open interest, making it the primary choice for a derivative reference price. In Calypso, the projected price returned by the Nearby method is equal to the the price of the first sequentially available curve point on or after the fixing date.

Lme3M — The LME 3 Month price is similar in concept to the Cash price. In Calypso, the projected price returned by the LME3M method is equal to the value on the curve which corresponds to the date 3 calendar months after the fixing date according to the Fixing Holiday Calendar subject to the Forward Price Holiday Calendar. Note: this value may correspond to an actual curve point, or may be interpolated using the interpolation method specified in the forward curve.

LmeCash — Futures listed on the London Metals Exchange (LME) have daily expiries, whereas most other commonly traded commodity futures have monthly listings. Because of this, LME products tend to be quoted in terms of tenor-based futures such as Copper Cash Buyer's Price or Lead 3 Month Buyer's Price. In keeping with this convention, derivatives settled using the LME Cash reference price require a method which can project the price of the official cash settlement price on a given fixing date. In Calypso, the projected price returned by the LMECash method is equal to the value on the curve which corresponds to the date 2 business days after the fixing date according to the Fixing Holiday Calendar subject to the Forward Price Holiday Calendar. Note: this value may correspond to an actual curve point, or may be interpolated using the interpolation method specified in the forward curve.

SecondNearby — The Second Nearby future on a given date is the future which is next to expire after the prompt. In Calypso, the projected price returned by the Second Nearby method is equal to the price of the second sequentially available curve point on or after the fixing date.

NearbyNonDelivered — The projected price for a fixing date will be equal to the value of the chronologically closest point on the forward curve which is equal to or greater than the fixing date subject to the restriction that the fixing date is not after that underlying's first delivery date, or for commodity forward points, the pillar date. If the fixing date falls after the nearby underlying's first delivery (or pillar) date, but before the underlying's last trading date, the value of the next (chronologically) curve point will be used.

Many agriculture future contracts have first delivery dates which fall BEFORE the last trading day, meaning that if you hold a short position in one of these contracts, even if the future is still trading, you may be notified by the exchange that you are required to deliver the physical commodity. Therefore, financial players in the agriculture markets always make sure that they exit future positions before the first delivery date to avoid that scenario. Likewise, financial derivatives, such as swaps and options, take a similar approach and will typically fix off of the nearest future which has not already passed its first delivery date.

For example, look at 2 consecutive CBOT Wheat futures:

For a commodity fixing on March 1, you would expect the NEARBY forward price method to use the LTD of 3/14/08 from the curve to project the price, and for a commodity fixing on March 5, you would STILL expect the NEARBY forward price method to use March 14, as the fixing has not passed the last trade date (aka the MAR08 curve date on the forward curve).

In terms of the above example, for a commodity fixing on March 1, you would expect the NearbyNonDelivered forward price method to use the LTD of 3/14/08 from the curve to project the price since it is before the MAR08 future's first delivery date. For a commodity fixing on March 5, you would expect the NearbyNonDelivered forward price method to use May 14 as the curve date from which to project the price as it is after the first delivery date of the nearby curve point.

Linear — The linear method is not a commonly used method. The projected price that it returns is the price from the curve for the date which is equal to the fixing date. For a curve which uses no interpolation between points, the Linear method will resemble the Nearby method.

Fixed — In some cases, derivatives are traded which agree upon a specific future as the reference price, regardless if that future is prompt, second prompt, etc. For these situations, we offer the Fixed forward price method. Using this method, the user must specify a date which corresponds to the date on the forward curve whose price will be used for all fixing dates for any derivative which uses that Commodity Reset. Any example would be a 3 month averaging swap over the months of Jan - Mar 2008 which references the Dec 2008 future. Each day of this swap will settle off of the price of the Dec 2008 future, therefore the projected price of all future fixing dates will be the same, based on the curve date chosen in the reset definition.

IceNearby — The convention of many swaps traded on the The Intercontinental Exchange (ICE) is to fix off of the prompt future up to, but not including, that future's last trading day. On that day, the price will fix off of the second prompt contract. The theory behind this is that there is uncharacteristic volatility associated with a future on it's last trading day due to market forces trying to reconcile positions before the future ceases trading. In Calypso, the projected price returned by the ICENearby method is equal to the price of the first available curve point after, but not equal to, the fixing date.

InterpolatedPrice — The forward price calculation is delegated to the interpolation method set on the underlying Market Data item, of which only curves are currently supported. If there is no interpolator set on the underlying market data item, "Nearby" forward price lookup method is used.

Note: You cvan add custom methods by creating a class named tk.product.commodities.priceselector.<ForwardPriceMethodName> that implements com.calypso.tk.product.commodities.priceselector.ForwardPriceMethod. Compile the class, and register the method name in the commodity.ForwardPriceMethods domain by choosing Configuration > System > Domain Values from Calypso Navigator.

Click ... to select the holiday calendar for the fixing method.

It defaults to the holiday calendar defined for the deliverable reset.

Enter the unadjusted price.

Enter any discount.

The discount may be calculated in the case of storage-based commodities. Complete the certificate details as described below, and click Compute Certificate Discount.

Note: The Final price is the only price used in the valuation of the commodity forward. Adding a discount only impacts the NPV of the trade if the discount is allowed to alter the final price.

The Final field displays the final price.

Select either a Fixed or Floating price, the currency and the units.

The Price currency and unit default to the currency and unit of the selected commodity. However, you can set these independently.

The Commodity Forward supports cross commodity unit conversion of the price units, deal units, and units for the certificates. The valuation is supported.

For example, the trade capture, valuation, and risk support entering physically delivered commodity Forwards where the price is quoted in reference currency and reference units, but the quantity is entered in terms of the number of future contract equivalents. This is standard in the LME Base Metal OTC market, where OTC Forwards and Listed Futures are interchangeable.

The conversion details should be configured in the commodity conversion table.

Select a commodity reset. You are able to select a different reset than the one that is being used to book the Forward.

Enter a Floating price spread.

Click the drop down box to display and select a desired date schedule for the float side of the forward.

The summary of what is chosen in the Date Schedule window is then displayed.

Select the date roll convention to roll the payment dates when they fall on non-business days. The payment calendar is used to determine business days.

From Calypso Navigator, chooseHelp > Date Roll Conventions for a description of date roll conventions.

Click ... to select the calendar(s) the application uses to determine the business days.

Specify lag days from the end date of the payment period (in business or calendar days) for the actual payment to take place. By default, business days are used to calculate the payment date. To specify calendar days, double-click the Bus label to toggle to Cal.

Select to enter a specific payment date.

Select the date roll convention to roll the payment dates when they fall on non-business days. The payment calendar is used to determine business days.

From Calypso Navigator, chooseHelp > Date Roll Conventions for a description of date roll conventions.

Click ... to select the calendar(s) the application uses to determine the business days.

Specify lag days from the end date of the payment period (in business or calendar days) for the actual payment to take place. By default, business days are used to calculate the payment date. To specify calendar days, double-click the Bus label to toggle to Cal.

Select to enter a specific payment date.

Date Schedule

See Intraday Policies for details. This field is displayed for swaps with Electricity resets. You need to enter an intraday policy for this type of swap, because resets can be at various times of the day, depending on the peak hour schedule.