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Financial energy futures

Financial energy futures. Basic Concepts. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at the moment of the exchange transaction.

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Financial energy futures

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  1. Financial energy futures

  2. Basic Concepts Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at the moment of the exchange transaction. Settlement price is calculated by the exchange at the end of the trading session. Settlement price is used as a basis for: - Variation margin calculation. - Price limits determination. - Minimal initial margin requirement. Variation margin is amount in money terms that is calculated during the clearing session and determines change in participants’ financial liabilities. Variation margin increases or decreases the initial margin and potentially determines trader’s profit or loss. Price limits – values that used for transaction price limitation and basic margin calculation (initial margin). Initial margin is amount of money to be collateralized in order to guarantee payment of open position liabilities. Margin amount is estimated risk of portfolio, that is calculated on the basis of initial margin requirement. Last trading day - the last trading date when the contract may be concluded (hereinafter- closing date of contract conclusion) is the last date of the contract delivery period. Clearing session – part of trading day when Clearing Center performs: - Calculation and transfer of variation margin; - Initial Margin calculation; - Total margin adequacy Contract Execution – contract price equating to the average index value.

  3. Derivative instruments of the Exchange ECPМ- YY.XX ECBМ- YY.XX EUBМ- YY.XX EUPМ- YY.XX SKBМ- YY.XX SKPМ- YY.XX Where the first symbol refers to the price zone (E- first price zone, S – second price zone), second symbol refers to the hub of the price zone (C - «Center», U - «Ural», K – «Kuzbass», third symbol refers to delivery hours (B – base load hours, P – peak load hours), fourth – delivery period (M - month), next coming the number of the delivery period within the year and finally the year of delivery. All contracts are financial, there is no delivery of underlying asset, fulfilled by financial settlement - by transfer of variation margin. The underlying asset of contracts is hourly average value of the hub index in specified price zone during specified delivery hours. Example: The underlying asset of contract «ECBM-02.10» is hourly average value of the hub index in «Center» hub of the first price zone during all hours in February, 2010.

  4. Future contract specifications Contract price is measured in index points multiple integer of one index point. Value of one index point is 1 RUR. Example: The average price of electric energy in «Center» hub of the first price zone during all hours is 700 RUR/MW*h, contract index value «ECBM-2.10» is 700 points. Contract volume is equal to product of the number of index points being the underlying asset by the number of delivery hours of the relevant type within the contract settlement period divided by 10. A tenfold decrease of the contract volume is due to the fact that the contract is designed on the basis of supply/consumption of 100 KWh, and the index value measured in RUR per 1 MW. Example: «ECBM-2.10» contract volume = 700 * 672 /10 = 47 040 RUR. Tick size – minimum allowed change of the contract price is 1 point Example of price change: Tick size value is essential to calculate Variation Margin and Initial Margin. Tick size value is equal to the number of supply hours of the relevant type within the contract settlement period divided by 10 (ten), measured in RUR. Example: Tick size value of «ECBM – 2.10» = 672/10=67,2 RUR.

  5. Future Trades Model Initial data: Delivery period – calendar month (February 28 days). Delivery hours – base load hours (24 hours) Number of delivery hours = 28*24=672 hours. Delivery volume – 100 KW*h. Contract price (hedged price of buying/supply) – 600 RUR/MW*h Contract volume = 100 KW*h * 672 hours = 67,2 MW*h or 67,2 MW*h * 600 RUR/MW*h = 40320 RUR. Number of electricity delivery hours 672 Price 642 VМi Settlement price in day i(Рi) VМ26 637 Final settlement price (Pi) = average index value for 28 days 631 630 VМ25 VМ4 VМ5…24 627 620 622 VМ3 VМ2 VМ1 610 600 Closing date Settlement date VМ1 = (620-600)*67,2/1 VМi= (Pi-Pi-1)*WI /S Суммарная VМ= VМ1+VМ2+…+VМ26+VМi Contract price 01.02.10 02.02.10 03.02.10. 04.02.10. 5…24.02.10 25.02.10 26.02.10 01.03.10 Date (i) Spot Market (Average index value) Future Market

  6. Termsofcalculatingthevariationmargin (VM) The variation margin is calculated and paid in the period from the first day of the contract conclusion before the date of contract execution, inclusive. The contract execution day is a trading day following the last day of the contract delivery period. Variation margin is calculated as follows: VМo =(Pi-Z)*W i/S VМi =(Pi-Pi-1)*W i/S VМo– variation margin of the contract on which the calculation of variation margin previously was not performed; VМi – variation margin of the contract on which variation margin calculations carried out earlier; Z – contract price; Pi – the current (last) settlement contract price on day i; Pi-1– the previous settlement contract price; Wi– tick size value on day i; S – tick size The final value of variation margin (for example VMi) on the contract execution day is determined during the evening clearing session. At determining liabilities the current settlement price is calculated as the average of all indices’ values, published by the Exchange for all days of the contract period.

  7. Example of VM calculation On the 1st of Februarythe consumer (hedger) buys one future contract. The contract price is 600. Tick size =Wi=672/10=67,2 VMi Formulas: VМi=(Pi-Z)*Wi/S, VМi=(Pi-Pi-1)*Wi/S The 1st of february Pi =620, Z=600, Wi=67,2 S=1 VМ1=(620-600)*67,2 /1= 1344 RUR The 2nd of February VМ2= (610-620)*67,2 /1=–672 RUR From 3rd till 26 of February VМ3..26= (637-610)*67,2 /1=1814,4RUR The 1st of March 642 - average index value for 28 days VМi= (642-637)*67,2/1=336 RUR The total variation margin for February: VМ = VМ1+VМ2+VМ3..26+VМi VМ = 1344-672+1814,4+336=2822,4 RUR Delivery hours 672 Price VМi 642 637 TotalVМ VМ3..26 620 VМ1 VМ2 610 Contract price600 Settlement date 1 Feb. 2 Feb. 3…26 Feb. 1 March. Date (i) Future market February 27-28, 2010 - weekends, so Closing date of contract conclusion is the 26 of February. The day of contract execution is the1stof Machas the last delivery day is 28 of February.

  8. Settlement price Settlement future contract prices are determined on the basis of day and evening trading sessions. Day trading session- durationfrom 10.30 till 14.00. Evening trading session- durationfrom14.03 till 18.45.  1. Method of settlement price determination when anonymous transactions were recorded during the trading session Window applications The price of the last anonymous transaction is 637 According to the method, settlement pricewill be equal to the last anonymous transaction 1.1 Settlement price of future contract is equal to the last anonymous transaction except particular case indicated in paragraph 1.2 The price of the last anonymous transaction is 636. The best bid is 637 which is higher than the price of the last anonymous transaction. According to the method, settlement price will be 637 1.2 If at the end of a trading period the price of the best active buy/sell bid is higher/lowerthan the price of last anonymous transaction, then the estimated price of future contract is taken as the price of the active bid. Example:

  9. Settlement price 2. Settlement price determination when no transactions were recorded during the trading session. 2.1. If at the end of trading period there are some active buy and sell bids the settlement price is determined as average value between the best prices of active sell bid and buy bid. Example: Best bid price for the purchaseis 632. Best bid price for the sale is 640. According to the method the settlement price will be equal to (632+640)/2=636. 2.2 If at the end of trading period the price of the active buy/sell bid is higher/lower than the previous settlement price, then the settlement price is determined as the price of this active bid. Example: The previous settlement priceis 630. The are not any bids for the sale. Best buy bid price is 632, that is higher than the settlement price 630. According to the method the settlement price will be equal to 632 3. In other cases, settlement price is equal to the previous settlement price The previous settlement price is 630 There are no buy bids, the bid with the price of 632 doesn’t satisfy terms 2.2. According to paragraph 3, Settlement price will be equal to 630. The previous settlement price 630 There are no active bids. According to paragraph 3, Settlement price will be equal to 630.

  10. Final settlement price calculation method Final settlement price is estimated as arithmetic average of all Index values being the underlying asset of a contract within the contract settlement period. Final Settlement Price =(620+610+…..+657+660)/28 Number of delivery hours 672 Value Index value at i-day 660 655 657 629 620 Date (i) 1 Feb 2 Feb 3..26 Feb 27 Feb 28 Feb Spot-Market

  11. Initial margin calculation MIMR – Minimal initial margin requirement is calculated as percent of settlement price, usually 4-10 %. IM – initial margin calculation is based on the daily price limits which depend on settlement price volatility. On a steady market MIMR = IM. On a volatile market MIMR > IM. Total margin is calculated on the whole portfolio. It’s size depends on portfolio risk and estimated as a net realizable value of client’s positions. An example of IM calculation : Future Settlement pricefor 01.02.2010 = 620 Let’s assume that the daily price limitsfor 02.02.2010 is -5%/+5%. Low price limit -589 High price limit - 651 Tick size for 02.02.2010 is 67,2 RUB. Tick = 1 point. IM for 02.02.2010 for opening 1st position is (651-589)*67,2/1=4 166,4 RUB.

  12. Total margin calculation Total margin calculation example for Broker’s client: Initial Marginon 07.02.2010 for «ECBМ - 2.10» contract = 4 400, for «SKBМ - 2.10» contract = 4 000. 1) 20 «ECBМ - 2.10» contractsbought: IM*20=4 400*20=88 000 RUR. 15 «SKBМ - 2.10»contracts bought: IM*20= 4 000*15=60 000 RUR. M1 = 88 000+60 000 = 148 000 RUR. 2) 10«ECBМ - 2.10» contracts sold: IM*(20-10)=4 400*10=44 000 RUR. M2 = 44 000 RUR Total margin = 44 000+60 000 = 104 000 RUB. IM calculation example for Broker: Client №1 has bought20 «ECBМ - 2.10» contracts : IM*20=4 400*20=88 000 RUR. M1 = 88 000 RUB. Client №2 has sold10 «ECBМ - 2.10» contracts : IM*10= 4 400*10=44 000 RUR. M2 = 44 000 RUB. Client №3 has sold15 «ECBМ - 2.10» contracts: IM*15= 4 400*15=66 000 RUR. M3 = 66 000 RUB. Broker’s position - 10 «SKBМ - 2.10» contracts: IM*10= 4 000*10=40 000 RUR. «ECBМ - 2.10»:max(20;10+15)=(10+15)* 4400=110 000 RUR. Total Marginfor Broker =40 000+ 110000=150 000 RUR.

  13. Trading hours • Trading hours (MSC Time): • 10.00 - 14.00 Trades • 14.00 - 14.03 Intermediate clearing (daytime clearing) • 14.03 - 18.45 Trades • 18.45 - 19.00 Evening clearing • 19.00 - 23.50 Trades

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