Petrogram - Fall 2008 - (Page 30)
FEATURE Hedging 101: Swap Contracts James Burr ast time around, we discussed the basics of futures contracts. This issue we are going to discuss the basics of swaps. For the purposes of this article, we will assume that “swaps contract,” “derivatives” and “over-the-counter contracts” (OTCs) are all interchangeable terms. A swap contract is a privately negotiated contract in which the terms and conditions are agreed to by both parties. If “Your Company” contacted “Acme Oil” and said: “Gulf Heating Oil is trading at $2.30 per gallon. How about we strike a deal: At the end of the month, if Gulf Heating Oil is above $2.30 per gallon, you pay me the amount it is above $2.30. If at the end of the month Gulf Heating Oil is below $2.30 per gallon, I will pay you that amount.” This is a swap; two ﬁrms privately negotiating a contract that will ultimately be settled not by physical delivery, but with their checkbooks. A swap contract is a hybrid between a futures contract and a contract for physical delivery. It is like a futures contract in that it has a ﬁnancial gain or loss based on the index stipulated in the contract. L It is similar to a contract for physical delivery in that each transaction is accompanied with a conﬁrmation of trade and both sides are expected to review for correctness, sign and return. A generic swap transaction would include all the terms and conditions of the contract, including: • Transaction date • Period of time the contract covers • Commodity • Structure (swap, option, basis contract, etc.) • Price • Quantity • Index the contract is to be based on • Settlement type (Asian, European) • Commission Charges Why should I use swaps? There are several advantages to using swaps as your riskmanagement tool. 1) Indices. The swap settlement pricing is based on an “index” that both parties agree to. The primary indices used for reﬁned fuels and propane are: Distillates and Gasoline • Gulf – Platts • Group III – Platts • Chicago – Platts • NY Harbor – Platts • NYMEX - NYMEX • Los Angles – Platts Propane • Mont Belvieu – OPIS • Conway – OPIS • Hattiesburg – OPIS A hedge should never be considered a “permanent” position; rather it should be reviewed and assessed if the current hedging tool (futures or swaps) is currently the correct choice. 30 | Petrogram | Fall 2008 www.fpma.org
Table of Contents for the Digital Edition of Petrogram - Fall 2008
Petrogram - Fall 2008
Welcome, New Board Members
Getting the Message Out There
Spotlight on FPMA's 2008 Convention & Trade Show!
Out & About the Industry
Alcohol Beverages & Tobacco Regulation: Questions and Answers
Hedging 101: Part II
What Owners Should Know
The Price-Gouging Statute
Conference of Committees Registration Form
Index of Advertisers
Petrogram - Fall 2008
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