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 Commodity Forwards Locate this document in the navigation structure

Use

The system can calculate the net present value (NPV) of commodity forward deals. Calculations are made as single transactions in the evaluations area of the Market Risk Analyzer . Therefore, each calculation requires a separate assigned financial object with an active analysis part.

Features

The calculation for the net present value of commodity forward deals shall be valid for:

  • deals created in the Transaction Manager.
  • generic transactions related to commodity forward deals.

The theoretical value of the commodity forwards is calculated in the following steps:

  1. Calculation of theoretical Forward Price of commodity

    ( ) ( )

    The spot price of the commodity is taken from the market data for commodity. The risk free interest rate is taken by reading the yield curve for the buying currency of the commodity, for the period until the expiry of the commodity forward (T) (number of days from today till maturity)

  2. Multiplication of the theoretical Forward Price with the quantity.

  3. Comparison and substraction of the theoretical Forward Price and the payment amount of the contract (agreed forward price * quantity)

  4. Discounting of the result with the free interest rate. The risk free interest rate is taken by reading the yield curve for the buying currency of the commodity, for the period until the expiry of the commodity forward (t) (number of days from today till maturity)

  5. After the calculation of theoretical cost for commodity, it is converted to the reporting currency.

    The exchange rate (R) (forward rate on contract expiry) for the commodity buy/sell currency and the reporting currency has to be considered for conversion.

    Note: The clean price of the commodity forward is calculated as shown above.