We herafter detail typical trading sequences, physical forward and hedges, in different industries. We detail trades, how their profit and loss are computed, and associated risk profile.



Oil trade terms
Component Description
Context A german airline wants to buy kerosene to fuel its flights for next month. Following terms have been agreed upon in the contract.
  • 10,000 MT (tolerance +- 1%) of Jet Kerosine (compliant to ASTM D1655 standards), CIF Cargo Hamburg.
  • Delivery for next month (MT+1) estimated bill of lading being around 15th of the delivery month, to be confirmed by seller.
  • The price paid will the average in USD/MT of the Mid of bid/offer quotes as published by Platt's European Marketscan under the heading: Jet Fuel Cargoes CIF NWE/Basis ARA.
  • The observation window to calculate the average will be a BL05_23 schedule (5 days around bill of lading, 2 days before, 3 days after, if bill of lading occurs on a non-business day according the Platt's calendar).
  • Jet quality is expected at par (with provisions in case of poorer quality) but a surcharge of 12.50 USD/MT has been agreed to account for the ARA-Hamburg spread.
  • Settlement is in USD. Due date is 5 business days (TARGET calendar) after price fixing date.
  • Even it the Physical forward remains a USD denominated trade, the customer decided to pay the delivery in EUR. The settlement flow in USD will be converted at the EUR/USD reference rate as published by the European Central Bank, 2 business days prior to the payment due date of the physical contract.


Supply desk

The supply manager will materialize the above deal by booking following 3 transactions:

  • Physical forward
    A contract concluded between his company and the oil merchant. It details delivery terms (including tolerances on quality, delivery dates and quantity), pricing rules and settlement conditions.
    Following the company's policy, he marks the physical leg, against an in-house curve, maintained jointly by the risk management and accounting team. This curve is broadly marked against benchmark indices, but considers as well how the company storage piled up over time, following a bespoke LIFO approach.
    In the CTRM system, this trade will be booked in portfolio PFL_Supply, which is where the supply manager follows the procurement positions.

  • Swap 1
    To hedge the Physical forward, the supply manager will buy a Swap with the company's trading team. He takes the same index as used to price the physical deal, same quantity, but due to the uncertainty around the bill of lading date, he decides to average the pricing index over the delivery month rather than just around BL. Fix price negotiated with the trading desk is close to current market level of the benchmark with a little add-on because both agree market is in contango.
    This intra-company trade will be booked between the portfolios PFL_Supply and PFL_HedgeCM, managed by the trading desk. This way the short position on the pricing index arising from the Physical forward is offset by a long position resulting from the Swap. The supply manager locks a fix price supply and is no longer exposed to market risk.

  • Forex forward
    For tax and accounting reasons, it is preferred to execute procurement in EUR. This is stipulated in the Physical forward, but to keep calculus simple, in a market which is predominantly labeled in USD, parties agreed to keep pricing in USD, and only convert the resulting cash flow in EUR, at the ECB rate prevailing on the settlement date. The supply manager, who manages his positions in USD, books a Forex forward with the treasury trader, for the estimated cash amount.
    This trade is booked between PFL_Supply and PFL_HedgeFX, managed by the treasury trader. This trade offsets the FX risk resulting from the settlement agreement of the Physical forward.

Trading desk

As an airline, the company is structurally short jet fuel, but the tree supply teams scattered around the globe have an active trading role: covering the fuel needs of the company, coordinating supply joint-ventures with affiliated and partner airlines and selling surpluses when they occur. The commodities trading desk receives all hedge orders from the supply teams and executes those in a cost-effective manner. Consolidating orders for delivery terms and tenors which are close but have opposite directions already reduces the net exposure. The still outstanding net position is hedged in the market. Focusing on the position initiated by the Physical forward detailed higher, one could envision following scenario:

  • Swap 2
    The trader considers that the Platts index adopted by the supply manager to price his procurement, which he accepted to hedge, is not very liquid for the time being and may be expensive to hedge off in current market conditions. He prefers to hedge the Jet position with Gasoil. He takes a quality spread risk, but considers it reasonable due to the good and stable price correlation observed between both products. He will book a first internal swap to transpose positions. Considering the different densities for both products (7.89 BBL/MT for Jet fuel, 7.45 BBL/MT for Gasoil, as published respectively by Platts and ICE), he will apply a factor of 1.059 to convert Jet tonnage in Gasoil equivalents. In our example there is as well a calendar mismatch, the 22nd of MT+1 being a Platts non-publication day, whereas ICE is open.
    The swap will be booked between portfolio PFL_HedgeCM and PFL_Execution, both managed by the trader, but helping him to segregate hedge requests from how he fullfills those.

  • Futures
    Clustering the Gasoil positions per future maturity bucket (the ICE Gasoil contract for a given delivery month expiring the 12th of that same month, or the preceding business day if a holiday), the trader can easily translate Gasoil 1st Line positions in equivalent futures position. He is thus able to hedge Jet fuel price risk in a consistent manner with very liquid, exchange traded Gasoil futures.
    Those trades are external ones, booked between PFL_Execution and a Clearer.