Key points
- Key terms: the benchmark price source (an exchange’s official or settlement price, or a physical market assessment), the quotational period (QP), the calculation convention (whether holidays are excluded and which price field is used), and the premium or discount and currency conversion.
- The price is set day by day during the quotational period, so until it ends the contract is partly priced and partly unpriced.
- Average pricing is generally used with provisional invoicing and final settlement, with any difference settled either way.
In practice
Average pricing takes the element of luck out of a single pricing date, but it adds daily calculation and reconciliation work. Traders need to capture the benchmark price every day and roll forward the average for the priced portion and the remaining exposure. Shipments spanning months, changes to the quotational period or disputes over the price source make the calculation more complex.
In finance, provisional prices, final prices and price-difference settlements produce several versions of the price and of the invoice. The basis of each version has to be kept to explain the final settlement amount. For imports, the date on which the average is fixed also affects the declared customs value and the declaration and back payment of import-stage taxes.
How Tranexio supports it
Tranexio draws prices from a single market data store to generate average price calculations, works out the priced portion and remaining exposure day by day across the quotational period, and keeps a version chain of estimated, provisional and final prices linked to settlement and invoicing. See Price fixing and price management.