Capturing Commodity OTC Option Trades

To capture Commodity OTC Option Trades, please use the Pricing Sheet - Commodity Vanilla.

Choose Trade > Commodities > OTC Options to open the Commodity OTC Option worksheet, from Calypso Navigator or from the Calypso Workstation.

Commodity OTC Option Quick Reference

When you open a Commodity OTC Option worksheet, the Trade panel is selected by default.

Configuration

Define the commodity product by choosing from Calypso Navigator

Define the commodity reset definition by choosing from Calypso Navigator

Entering Trade Details

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

Or you can enter the trade fields directly. They are described below, see Field Description.

Note that the Trade Date is entered in the Details panel.

Proceed to the other panels as applicable.

Saving a Trade

Hit F5 to save the trade, or choose .

You can also hit F3 to save the current trade as a new trade, or choose Trade > Save As New.

A description will appear in the title bar of the trade worksheet, a trade id will be assigned to the trade, and the status of the trade will be modified according to the workflow configuration.

The description is in the form of ProductType/OptionTypeOptionStyle/UnderlyingCommodityMaturityDate Strike

Pricing a Trade

The following pricers are available for Commodity OTC Options out-of-the-box: PricerCommodityOTCOption2LTBlack, PricerCommodityOTCOptionAnalytic and PricerCommodityOTCOption2Clewlow.

You can add the following pricer measures for the option strategies if they do not appear in the system by default: LOWER_PAR_STRIKE and UPPER_PAR_STRIKE. To do this, from Calypso Navigator, .

A commodity otc option trade requires the following market data: a discount curve, a commodity forward curve for forecasting the prices, a commodity volatility surface, and commodity reset quotes.

Note that a cross-currency commodity otc option also requires an FX curve, an FX rate, and an FX reset.

You can choose to check if all required pricing data are available in the Pricing Environment.

Click Price to price the trade.

Trade Lifecycle

You can allocate the trade to multiple books using

You can terminate and partially terminate the trade using

Prices can be fixed from Calypso Navigator by choosing

For physically settled options, you can exercise the option from the trade worksheet using

For cash settled options, the option can be exercised using the Price Fixing function, either through the Price Fixing window , or the PRICE_FIXING scheduled task.

For cash settled options, it is possible to choose not to exercise in-the-money options by manually de-selecting the Exercise? checkbox for the option in the Price Fixing window.

See also - All Trade Menus for information on functions, menus and panels common to all trade windows

1. Sample Commodity OTC Option Trade

2. Commodity Option Types Table

Option Type	Number of Strikes	Strike	Components of Option Structure
			Buy	Sell
Put	1	x	Buy Put Option with Strike x	Sell Put Option with Strike x
Call	1	x	Buy Call Option with Strike x	Sell Call Option with Strike x
Put Spread	2	x,y, where x>y	Buy Put Option with Strike x and Sell Put Option with Strike y	Sell Put Option with Strike x and Buy Put Option with Strike y
Call Spread	2	x,y, where x<y	Buy Call Option with Strike x and Sell Call Option with Strike y	Sell Call Option with Strike x and Buy Call Option with Strike y
Straddle	1	x	Buy Call Option with Strike x and Buy Put Option with Strike x	Sell Call Option with Strike x and Sell Put Option with Strike x
Strangle	2	x,y, where x>y	Buy Call Option with Strike x and Buy Put Option with Strike y	Sell Call Option with Strike x and Sell Put Option with Strike y
Risk Reversal	2	x,y, where x>y	Buy Call Option with Strike x and Sell Put Option with Strike y	Sell Call Option with Strike x and Buy Put Option with Strike y
Synthetic Forward	1	x	Buy Call Option with Strike x and Sell Put Option with Strike x	Sell Call Option with Strike x and Buy Put Option with Strike x

3. Barriers

You are able to add a barrier (knock-in or knock-out) to a cash settled OTC Commodity Option. The barrier is active for the entire life of the option, or until triggered. To set the Barrier details, click the Edit button next to the Barrier field.

The Barriers Details window is then displayed.

The Barrier is considered when calculating cashflows.

•

Type UP & IN, cashflows will be paid/received only if the barrier is hit

•

Type UP & OUT, cashflows will be paid/received until the barrier is hit

•

Type DOWN & IN, cashflows will be paid/received only if the barrier is hit

•

Type DOWN & OUT, cashflows will be paid until the barrier is hit

Field	Description
Barrier Count	The default setting is 'No Barrier'. Click in this field and select 'Single' to add a barrier to the option.
Type	Select the type of barrier: 'UP & IN', 'UP & OUT', 'DOWN & IN', 'DOWN & OUT'
Level	This is the absolute price level of the barrier. This price is understood to be quoted in the option strike units per option settlement currency.
Level %	This field is not yet implemented.
Rebate	A rebate can be paid if an option is knocked out. To include a rebate, set this field to 'Yes'.
Amount	The amount of the rebate per commodity unity. The rebate is entered in amount per strike unit. For example, a rebate may be entered as "0.35 per barrel" by entering 0.35 in this field.
Currency	The currency of the rebate. This should always be equal to the settlement currency of the option.
Payment Timing	The payment schedule of the rebate. This can be paid at the original option maturity (At Maturity) or on a date relative to the knock out event (At Instant).

Note: The commodity barrier option is compatible with the Option Lifecycle Analysis, where you can monitor the barriers, flag for trigger or exercise as well as other useful features. You must also be sure to configure the appropriate workflow to allow commodity options to be triggered and exercised.

4. Fields Description

Field

Description

Role/Cpty

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.

Book

Trading book to which the trade belongs. Defaults 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.

Ext Ref

Int Ref

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 pressing [Enter].

You can also display the internal reference of 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.

Status

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 the actions performed on the trade.

Broker

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

Template

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

Broker

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

Buy/Sell

Specify whether the processing organization is buying or selling the option.

Option Type

Select PUT or CALL. Or you can select one of the following Commodity Option Strategy types: Put Spread, Call Spread, Straddle, Strangle, Risk Reversal, Synthetic Forward.

Payment Currency

Select the currency in which the payments occur.

If the payment currency is different than the reference currency, you can enter details for the FX Conversion, as described below.

Settlement

You can select the exercise type for settling the option:

CASH – generates an exercise fee that attaches to the trade.

PHYSICAL – generates a Commodity Forward trade. The Option Type can only be PUT or CALL.

Option Style

Choose a subtype for the option. The choices are:

•

American – Settlement type is Physical

•

Asian – Cash settled, more than one fixing date per period

•

Digital – Settlement type is Cash, Option Type is Digital Call or Digital Put

•

European – Settlement type is Physical, default selection

•

Standard – Settlement type is Cash, only one fixing date per period.

•

FWDSTART - Settlement type is Cash, Option Type is Forward Put or Forward Call

Option
Commodity Reset	Select the commodity reset for the trade.
Reference Currency	Displays the reference currency as defined in the commodity reset definition. This field cannot be modified.
Fwd Price Method	Displays the forward price method as defined in the commodity reset definition. This field cannot be modified.
Fixing Calendar	Displays the calendar(s) to use when calculating the fixing dates. These default from the commodity reset definition. You can modify the calendars. Click ... to select the calendars.
Spread	Optional. Enter a spread based on the delivery location. The spread should be entered as a straight percentage rate. It is possible to specify a Spread Schedule by clicking the ellipsis button. This action displays a Spread Schedule window where you can designate specific spread for each time period. Note: Spread schedule is supported for Periodic, FutureContractFND, FutureContractLTD, Daily, Daily Rule and Third Wednesday Pay frequency only.

Strike The input fields vary depending on the Option Type that you select. See Commodity Option Types above for descriptions of the option types. See Sample Commodity Option Strategy Trades below for examples of the trades.
Strike	Enter the price per unit. You can enter as many decimal places as needed to get the payments to the desired amount. There is no rounding of the strike when calculating the payments. It is possible to specify a Strike Schedule by clicking the ellipsis button. This action displays a Strike Schedule window where you can designate specific strike for each time period. Note: Strike schedule is supported for Periodic, FutureContractFND, FutureContractLTD, Daily, Daily Rule and Third Wednesday Pay frequency only.
Buy/Sell Units	Specifies the quote unit, which defaults from the commodity reset definition. However, you can select a different unit.
Par Strike	The Single Fixed Strike denominated in DealCurrency per StrikeUnit which would result in the same PV as the Strike(i).

Date Schedule Define the fixing dates for the floating prices, settlement dates, and how many optionlets (option periods) are valued over the life of the option.
Pay Freq.	See Payment Frequencies for details.
Fixing Policy	See Fixing Policies for details.
Intraday Policy	See Intraday Policies for details.
Indexation	See Gas Oil Indexation Swap for details.

Option Expiry Panel — Physical Settlement

When the settlement type is physical, select the exercise type and enter the exercise details. Physical options expiry does not take into account the time on the reset.

American Exercise

Select the American Exercise type, and enter a date range when you can exercise the option. The Binomial model is used to price.

See Sample Exercised Trades below for some examples.

European Exercise

Select the European Exercise type, and enter the expiration date when you can exercise the option. The Black model is used to price, which is the same as pricing a financial-settled Bullet Option.

FX Reset Cal

Displays the calendar(s) used to determine business days for the FX reset.

The calendars are defined in the FX rate definition. You cannot modify this field.

Quantity Schedule Specify the details about the deal quantity schedule. Details about the deal quantity and the reference quantity can be viewed in the Cashflows.
Quantity	Specify the deal quantity to trade for a specified frequency. It is possible to specify a Quantity Schedule by clicking the . This action displays a Quantity Schedule window where you can designate specific quantities for each time period. Click Generate to generate the dates after selecting the frequency from the drop-down menu. After entering the quantities, click Apply. When a Quantity Schedule is in place, an * will appear next to the Quantity field. Bullet payment frequency is not supported with this feature.
Quote Unit	Unit of measure that the deal quantity represents.
Per Period	Specify the frequency that the deal quantity is traded. 'DLY - Future Contract Delivery Period' can also be selected in ‘Per Period’ drop-down in addition to the existing options, when Date Schedule Pay Frequency is FutureContractLTD or FutureContractFND.
Total Qty	The total deal quantity traded for the swap.
After Conv	Set to ‘Round’ to indicate that the reference unit to deal unit conversion of the price should be rounded prior to calculating the amount for the cash flow. The default is ‘Don't Round’, which means the rounding occurs after the amount is calculated.

FX Conversion The FX Conversion is required when the payment currency is different than the reference currency. You can select the rounding method for both cross currency and single currency deals in the FX Conversion panel.
FX Reset Rate	Select the FX Reset to use for conversion of prices from the reference currency to the payment currency.
Avg Method	See Averaging Methods for details.
Rounding After	See Rounding Policies for details.
FX Reset Cal	Displays the calendar(s) used to determine business days for the FX reset. The calendars are defined in the FX rate definition. You cannot modify this field.

Payment Schedule Define when the payment occurs for each optionlet.
Calendar	Click ... to select the holiday calendar(s) used to determine the business days when calculating the payment date.
Payment Lag	Specify lag days from the end date of the swaplet (in business or calendar days) for the actual payment to take place. Enter N days for the payment to occur N days after the swaplet end date. Enter 0 for the payment to occur on the swaplet end date. Enter –N days for the payment to occur N days before the swaplet end date.
Payment	Select to enter payment details. This makes a field available next to the Day label where you can specify which day the payment should take place. For example, enter “5” to specify that the payment date occurs on the 5^th of the month following the swaplet end date. Double-click the Day label to switch to Rule and select a date rule for determining the payment date if required. Click ... to select the payment date rule.
Date Roll	Select the date roll convention to roll the payment dates when they fall on business days. The payment calendar is used to determine business days. Date roll conventions are described under Calypso Navigator by choosing Help > Date Roll Conventions.

5. Sample Exercised Trades

Solving for a Strike Given a Target PRICE

5.1 Cashflows

The cashflow column ‘Days’ is modified to store number of days in Delivery Period i.e. days in between cashflow column 'Und Future First Del date' and 'Und Future Last Del date' including first and last date in the period when Date Schedule Pay Frequency is FutureContractLTD or FutureContractFND and Per Period - 'DLY - Future Contract Delivery Period' is selected.