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Your need
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- You will need to buy 300 metric tonnes of sorghum at a future date.
- You would like to agree a fixed price in AUD now for when you buy your sorghum.
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Your view
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Solution
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Benefit
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- Protects you from an increase in sorghum prices.
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Disadvantages
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Possible outcomes
Click on the links to veiw examples of pricing date outcomes
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Pricing and transaction details
After credit approval, you enter into a sorghum swap for 300 metric tonnes with the Bank. The Bank calculates the fixed price of the sorghum swap to be AUD200.00.
Upon entering into the swap transaction, the fixed price will be based off the current AUD price of the sorghum futures contract on the Australian Securities Exchange (ASX).
On the pricing date, the commodity reference price is the AUD price of the sorghum futures contract on the ASX.
Assume the following on the trade date:
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Transaction amount:
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300 metric tonnes
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AUD fixed price per tonne (calulated by the Bank):
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200.00
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Pring date:
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Future date agreed by the Bank
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Payment date:
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2 business days after pricing date
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Scenario 1: On the pricing date, the Commodity reference price is higher than your fixed price.
The commodity reference price is AUD250.00 (higher than the fixed price).
Therefore, on the payment date, the Bank must pay you a cash settlement amount which is the difference between the fixed price and the commodity reference price.
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Cash settlement amount:
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300 tonnes x (AUD250.00 – AUD200.00) = AUD15,000.00
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Amount received in the physical market:
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300 tonnes x AUD250.00 = AUD75,000.00
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Net result:
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The cash settlement amount compensates you for the higher price you paid when you bought your physical sorghum.
Payment for purchase: + AUD75,000.00
Cash settlement amount: - AUD15,000.00
Total paid: + AUD60,000.00
Or AUD200.00 per tonne (AUD60,000.00 ÷ 300 tonnes).
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Scenario 2: Commodity reference price is lower than your fixed price.
The commodity reference price is AUD150.00 (lower than the fixed price).
Therefore, on the payment date, you must pay the Bank a cash settlement amount, which is the difference between the fixed price and the commodity reference price.
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Cash settlement amount:
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300 tonnes x (AUD200.00 – AUD150.00) = AUD6,000.00
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Amount received in the physical market:
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300 tonnes x AUD150.00 = AUD45,000.00
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Net result:
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The cash settlement amount offsets the amount you paid when you bought your physical sorghum.
Payment for purchase: + AUD45,000.00
Cash settlement amount: + AUD15,000.00
Total paid: + AUD60,000.00
Or AUD200.00 per tonne (AUD60,000.00 ÷ 300 tonnes).
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Scenario 3: The commodity reference price is the same as your fixed price.
The commodity reference price is AUD200.00.
Therefore, on the payment date, you and the Bank have no further obligations to each other in respect of the sorghum swap transaction.
Note: Examples are used for illustrative purposes only and do not reflect current fixed or floating prices or other values or outcomes.
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