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Financial energy futures

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

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Page 1: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Financial energy futures

Page 2: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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.

Basic Concepts

Page 3: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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.

Derivative instruments of the Exchange

Page 4: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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.

Future contract specifications

Buy Sell

700 701

699 702

698 703

Page 5: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Date (i)

Number of electricity delivery hours

Price

600

610

627622

642

630 631

Closing date

5…24.02.10 01.03.1026.02.10

672

Settlement price in day i(Рi)

620

Contract price

01.02.10 02.02.10 03.02.10. 04.02.10. 25.02.10

637Final settlement price (Pi) =

average index value for 28 days

Settlement date

VМ1VМ2

VМ26

VМ25

VМ5…24

VМ4

VМ3

VМi

VМ1 = (620-600)*67,2/1VМi = (Pi-Pi-1)* W I /SСуммарная VМ = VМ1+VМ2+…+VМ26+VМi

Future MarketSpot Market

(Average index value)

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*hContract volume = 100 KW*h * 672 hours = 67,2 MW*h or 67,2 MW*h * 600 RUR/MW*h = 40320 RUR.

Future Trades Model

Page 6: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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.

Terms of calculating the variation margin (VM)

Page 7: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Example of VM calculation

On the 1st of February the 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 februaryPi =620, Z=600, Wi=67,2 S=1

VМ1=(620-600)*67,2 /1= 1344 RUR

The 2nd of FebruaryVМ2= (610-620)*67,2 /1=–672 RUR

From 3rd till 26 of February VМ3..26= (637-610)*67,2 /1=1814,4 RUR

The 1st of March642 - average index value for 28 daysVМi= (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

Contract price 600

Date (i)

Delivery hoursPrice

VМ1

620

610

642

637

1 Feb. 3…26 Feb.

672

2 Feb. 1 March.

VМ3..26

VМ2

VМi

Total VМ

Future market

Settlement date

February 27-28, 2010 - weekends, soClosing date of contract conclusion is the 26 of February.

The day of contract execution is the 1st of Mach as the last delivery dayis 28 of February.

Page 8: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Settlement price

Settlement future contract prices are determined on the basis of day and evening trading sessions.Day trading session - duration from 10.30 till 14.00.Evening trading session - duration from 14.03 till 18.45.

 1. Method of settlement price determination when anonymous transactions were recorded during the trading session

Sell Price Buy

233 64115 640

637 100636 20625 200618 900

The price of the last anonymoustransaction 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/lower than the price of last anonymous transaction, then the estimated price of future contract is taken as the price of the active bid. Example:

Window applications

1.1 Settlement price of future contract is equal to the last anonymous transaction except particular case indicated in paragraph 1.2

Sell Price Buy200 64130 639

500 638636 48635 200620 900618 1000

The price of the last anonymoustransaction is 637According to the method, settlement price will be equal to the last anonymous transaction

Page 9: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

 2. Settlement price determination when no transactions were recorded during the trading session.

The previous settlement price is 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

Sell Price Buy

632 100623 200620 900618 1000

Sell Price Buy 233 64115 640

632 100630 20623 200618 900

Best bid price for the purchase is 632. Best bid price for the sale is 640.According to the method the settlement price will be equal to (632+640)/2=636.

Settlement price

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:

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 price is 630There 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.

Sell Price Buy 150 632

Selling Price Purchase The previous settlement price 630There are no active bids.According to paragraph 3, Settlement price will be equal to 630.

3. In other cases, settlement price is equal to the previous settlement price

Page 10: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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

Date (i)

Number of delivery hoursValue

629

620

660

655

1 Feb 3..26 Feb

672

2 Feb 28 Feb

Spot-Market

27 Feb

657

Index value at i-day

Page 11: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

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 price for 01.02.2010 = 620

Let’s assume that the daily price limits for 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.

Initial margin calculationInitial margin calculation

Page 12: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Total margin calculationTotal margin calculation

Total margin calculation example for Broker’s client:

Initial Margin on 07.02.2010 for «ECBМ - 2.10» contract = 4 400, for «SKBМ - 2.10» contract = 4 000.

1) 20 «ECBМ - 2.10» contracts bought: 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 bought 20 «ECBМ - 2.10» contracts : IM*20= 4 400*20=88 000 RUR. M1 = 88 000 RUB.

Client №2 has sold 10 «ECBМ - 2.10» contracts : IM*10= 4 400*10=44 000 RUR. M2 = 44 000 RUB.

Client №3 has sold 15 «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 Margin for Broker =40 000+ 110 000=150 000 RUR.

Page 13: Financial energy futures. Future contract is a contract (liabilities of the parties) at a specified future date at a price and contract volume fixed at

Trading hoursTrading hours

Trading hours Trading hours ((MSC TimeMSC Time):):

10.00 - 14.00 10.00 - 14.00 TradesTrades

14.00 - 14.03 14.00 - 14.03 Intermediate clearingIntermediate clearing ( (daytime clearingdaytime clearing))

14.03 - 18.45 14.03 - 18.45 TradesTrades

18.45 - 19.00 18.45 - 19.00 Evening clearingEvening clearing

19.00 - 23.50 19.00 - 23.50 TradesTrades