#BasisSwaps - Twitter Hashtag

7 months ago

#NaturalGasFutures #BasisSwaps Following the remarks re physical natural gas transactions, these are some remarks regarding simple natural gas futures and basis swap transactions. For space, I still need to post some diagrams. Options are somewhat important for natural gas but nowhere near as important as they are for electric power, so I did not include them for space. Spreads between gas and power are important as trade issues but are not covered here. Simple Off-Exchange Fixed Price as a Hedging Structure: Bilateral Agreement regarding price between counterparties This simple structure is not trivial, but is not a cleared derivative. The fixed price physical contract may help the parties with length, and they are not so worried re liquidity if they are setting up a new project. CME/NYMEX trading is most liquid for the first 18 months forward, but the listing length for bid/offers is 12 years. Trading may be thin, but for data centers where a long term PPA may be involved, there could be a taker for an offer to buy or an offer to sell because everyone is going to know about your project, but parties may want something more in a counterparty than anonymity. With the fixed price off-exchange contract, Counterparty Credit Risk must be mitigated through other means. If the underlying contract for which the gas is needed is long-term, a fixed price contract presents counterparty credit risk that is handled in a long-dated futures or basis swap transaction. Apart from lack of a counterparty credit risk mechanism, the bilateral fixed price is the simplest commodity price hedge, and can result from several factors: low volatility, relative unimportance of fuel costs; desire to avoid hedge accounting; knowledge that one or both parties can take their fixed price to the futures and swaps markets to hedge and leave the fixed price in place for the other original counterparty. Natural Gas Futures Contract: A Standardized Financial Contract There are energy futures contracts for many energy commodities, the two most important are the contracts for WTI (oil) and natural gas. The most important and liquid oil futures contract is the West Texas Intermediate (WTI) Crude Oil contract traded on the CME Group NYMEX exchange. It serves as the primary US benchmark, with over 1 million contracts traded daily, reflecting global oil price trends and providing essential hedging for physical oil assets. A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. An exchange-traded futures contract specifies the quality, quantity, physical delivery time and location for the given product. The specifications of the contract are identical for all participants. This characteristic of futures contracts allows buyer or seller to easily transfer contract ownership to another party by way of a trade. Given the standardization of the contract specifications, the only contract variable is price. Price is discovered by bidding and offering, also known as quoting, until a match, or trade, occurs. (This kind of posting and matching system follows simple game theory principles.) Clearing is guaranteed through the exchange. The fact that futures contracts are standardized and exchange-traded makes these instruments a toolkit necessity to commodity producers, consumers, traders and investors. How Clearing Works: Deconstruction of Contract Into Two Contracts Once there is a match, hedging contracts are separated into two contracts then submitted to the exchanges for clearing: A (long) & B (short) have a swap contract and take it to the exchange for clearing. The contract A>>B becomes 2 contracts: a) Contract 1: exchange sells to A (long) at agreed price AND b) Contract 2: B sells (short) to the exchange Some Important Exchange Traded Hedging Structures - Henry Hub Futures Contract NYMEX NG A Buyer or Seller posts his desire for natural gas to be delivered to Henry Hub. Henry Hub natural gas futures (NYMEX NG) trade liquidly for over 18 months, with CME Group listing monthly contracts for the current year and up to 12 consecutive years forward. While the most active trading occurs within the prompt 18-month window, the market allows (and will clear) listing and hedging far into the future. Basis Swaps Using NYMEX Contract + Regional Basis Contract OR Both Rolled Together Spreads and spread trading in the form of locational basis trades are common and profitable in gas (since they can sometimes be arbitrages). Locational basis for Natural Gas is the difference between the price at Henry Hub NYMEX NG and the regional gas pricing point. There are over 80 defined gas pricing points, some with much more liquidity than others. These pricing points are defined in the methodology section of the physical gas pricing newsletters so the parties have a consistent understanding regarding regional characteristics for their contracts. The difference between the Henry Hub and regional price can be stable or volatile or may become volatile during seasons or other events. And these differences can become both great and volatile. What can be done about the locational basis differentials? Do nothing is one strategy. The thinking: Ignore the basis: the Henry pricing point is dominant & basis (usually pipeline transport cost approx.) is small Oftentimes the basis is significantly greater than the transportation tariff cost of moving the gas from point A to point B. These pipeline transport differences are set within a range in tariffs. Fundamentals can cause the spreads to blow up. Another thing that can be done is to hedge the basis using either (1) a NYMEX Henry Hub contract PLUS a separate (2) basis swap OR enter into a regional basis swap with the Henry Hub component embedded (embedded swap). This can be done off-exchange using a swap dealer also. In both cases, the counterparty either gives money or gas to the swap dealer who does the opposite with the other counterparty. Basis Swaps and Storage Gas is stored both in storage facilities near gas pipelines and Is parked on the pipelines themselves, if given permission. If the storage is long term, say for a winter season, the party storing may be able to secure an arbitrage by buying the winter gas in summer, selling it in summer at the futures price, and holding it in storage, paying the storage rates (inventory, withdrawal), then withdrawing the gas in accordance with the months for which you commited to deliver; Rollovers are common in storage transactions. (I think AI has embedded a mistake calling the regional basis swap a fixed price contract on the Nat Gas Intell website. The described structure is simply two contracts: futures + basis. Those two contracts can be rolled into one: embedded basis swap contract. It is an excellent structure for the gas industry, but it is not fixed.)

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Bank for International Settlements @BIS_org

almost 4 years ago

The #Libor reform reduced some risks but gave rise to new ones, stemming from the variety of reference rates, which drove the increase in trading of new #BasisSwaps #BISQuarterly #BISTriennialSurvey https://t.co/BWP8gGt0WQ

BIS_org's tweet photo. The #Libor reform reduced some risks but gave rise to new ones, stemming from the variety of reference rates, which drove the increase in trading of new #BasisSwaps #BISQuarterly #BISTriennialSurvey https://t.co/BWP8gGt0WQ https://t.co/HrEYhJWZCV

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Bank for International Settlements @BIS_org

almost 4 years ago

The #Libor reform reduced some risks but gave rise to new ones, stemming from the variety of reference rates, which drove the increase in trading of new #BasisSwaps #BISQuarterly #BISTriennialSurvey https://t.co/BWP8gGt0WQ

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Bank for International Settlements @BIS_org

almost 4 years ago

The #Libor reform reduced some risks but gave rise to new ones, stemming from the variety of reference rates, which drove the increase in trading of new #BasisSwaps #BISQuarterly #BISTriennialSurvey https://t.co/BWP8gGt0WQ

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Big Willie Enough Said @latticeworkwlth

almost 6 years ago

@StealthQE4 Looking into last 15 minutes for big imbalance... #stocks #bonds $SOY $SPY $TLT $EMB $LEMB $IGOV... $CMBS #ABs #basisswaps #SWAPTIONS ... k k on #SOFR & #Libor #quant #NNT ... #LNG... ❤️

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Cantillon Consulting @CantillonCH

over 6 years ago

#ECB inspired exposures from the Eurozone can be gauged from #bank external assets. Back to #GFC highs... #basisswaps #crosscurrency #carrytrade #forex

CantillonCH's tweet photo. #ECB inspired exposures from the Eurozone can be gauged from #bank external assets. Back to #GFC highs...
#basisswaps #crosscurrency #carrytrade #forex https://t.co/HV1b0npMgA

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Cantillon Consulting @CantillonCH

over 6 years ago

Why this matters in the context if the ongoing speculative liquidation. #BOJ-driven lending has fnanced the bulk of GCI (read: #hedgefund, etc) positioning #basisswaps #forex #centralbanks

CantillonCH's tweet photo. Why this matters in the context if the ongoing speculative liquidation. #BOJ-driven lending has fnanced the bulk of GCI (read: #hedgefund, etc) positioning
#basisswaps #forex #centralbanks https://t.co/SHXE3RjpFv

xero @TradingandMore

over 6 years ago

JPY/USD 3m basis swap is coming down a little today. Also note that Japanese financial years are usually end with March.

TradingandMore's tweet photo. JPY/USD 3m basis swap is coming down a little today.

Also note that Japanese financial years are usually end with March. https://t.co/hngdDPVZSy

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Cantillon Consulting @CantillonCH

over 6 years ago

More penny-pickers are starting to get steamrollered - this time in #forex #volatility & #basisswaps blowing out as the Almighty Dollar exerts its safe(r) haven pull over all those #centralbank-driven carry & smartass-‘structured’ trades the yield hungry have been merrily doing