Reply To: When to have single fixing or multiple fixings on ComFuts ?

#8491
Israr Ahmed
Keymaster

Yes agree on that as a starting point. The Risk Drop-Off is certainly key.

But for something like a Coal Future ( http://www.cmegroup.com/trading/energy/coal/coal-api-2-cif-ara-argus-mccloskey_contract_specifications.html ) it’s not always the case that its absolutely necessary that the risk should drop off and very often you find that from a practicality and expense point of view the client is happier with a single fixing from the Exchange ( which is doing the averaging for you ) rather than subscribing to the much more expensive “Argus/McCloskey’s Coal” Friday prices ( which are actually known on Monday ).

It also links into the question about whether the Exchange product is :

(1) A Future with a single settlement price based on a single price observation ( ie WTI on NYMEX )
(2) A Future with a single settlement price which is actually based on an average ( ie COAL on CME / ICE )
(3) A Swap with a fixing structure ( ie IRON ORE on SGX )
(4) A Index Future with a fixing structure ( ie also IRON ORE on SGX )

From an economic view in fact there is no difference between (2) and (3) and (4) . In fact you will find traders who refer to COAL Futures as Swaps.

Now …for (2) / (3) / (4) if the Risk Drop off is required then obviously you need to have the Fixing Structure on the ComFut . Otherwise you would think you can get away with a single fixing as long as you are getting the averaged prices coming through ( which as its an exchange product you would ).

However that’s not the only consideration.

Consideration should also be given to what type of Exchange Options are also going to be traded.

If you’re going to be trading a simple Exchange European Option that exercises into a Future then you can still go with having the Future set up as a single fixing Future.

However if you’re also going to be trading Exchange Asian Options that financially settle based on averaged fixing in prices – then – to value this correctly as an Asian Option with averaging structure – using a ComOptFut – then you will need to create the ComFut with the fixing structures on there.

So the decision to go with single fixing / multiple fixing on Futures that have an underlying average structure depends on I think 2 factors :

(1) Do we need to see Risk drop off on the Future
(2) Will we be needing Exchange Asian Options ( which need the ComFut linked that has the averaging structure on it )

If either of (1) or (2) is true then you need to have the fixing structure on the ComFut. Else you could get away with a single fixing.

Download PDF version

This field is for validation purposes and should be left unchanged.