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Commodity Basket

Commodity Basket. 2012-11-09. Agenda. Problem Statement Use Cases Objective Proposal. Problem Statement. CommodityOption only supports a single underlyer Lack of an ability to describe spread options. Use Case. Heat Rate Option Jan 1 2012 -> Mar 31 2012

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Commodity Basket

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  1. Commodity Basket 2012-11-09

  2. Agenda • Problem Statement • Use Cases • Objective • Proposal

  3. Problem Statement • CommodityOption only supports a single underlyer • Lack of an ability to describe spread options

  4. Use Case • Heat Rate Option • Jan 1 2012 -> Mar 31 2012 • 24x7 Electricity Mass Hub, Point 4000 • Hour Quantity: 1 MW • Total Notional: 2160 MWh • Nat Gas @ Rate of 7.2 + 5USD • Settlement: Each calendar Month End • Option Type: call • Average prices within each settlement period • Strike 0 • Premium of $10/MWh

  5. Objective • Create ability to describe a basket of products • Each product must be able to independently describe: • Price • Weight • Conversion factor between the constituent product unit vs. the top level product unit • Conversion factor between the constituent pricing unit vs. the settlement currency of the top level product • Direction

  6. Proposal • Reuse the equity Basket type • Extend the basketConstituent/underlyerPrice (type Price) • Add support for Floating Price • Add support for Fixed Price • Add support for fxConversion • Extend the basketConstituent/underlyerNotional (type Money) • Change to a substitution group to support a conversionFactor • Extend the basketConsituent/underlyerSpread (type SpreadScheduleReference) • Change to a substitution group to support commodity spreads

  7. Constituent Example &Heat Rate Option Example(please open the included FpML example) <basketConstituent> <payerPartyReferencehref=“Party1”/> <receiverPartyReferencehref=“Party2”/> <underlyingAsset> <commodity> <instrumentId>NATURAL GAS-TETCO M-3-GAS DAILY</instrumentId> <specifiedPrice>Settlement</specifiedPrice> <multiplier>7.2</multiplier> </commodity> </underlyingAsset> <constituentWeight> <basketPercentage>1</basketPercentage> </constituentWeight> <underlyerPrice> <floatingPrice> <calculationPeriodsScheduleReferencehref="floatinglegcalculationperiod0"/> <pricingDates> <dayType>CommodityBusiness</dayType> <dayDistribution>All</dayDistribution> <businessCalendar>NYMEX-OIL</businessCalendar> </pricingDates> <averagingMethod>Unweighted</averagingMethod> <rounding> <roundingDirection>Nearest</roundingDirection> <precision>3</precision> </rounding> </floatingPrice> </underlyerPrice> <underlyerPriceSpread> <spread>5</spread> <spreadUnit>USD</spreadUnit> </underlyerPriceSpread> </basketConstituent>

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