Key points
- Pricing formula: contract price = fixed futures price + premium or discount (basis). The premium or discount is agreed at signing; the futures price is set when the price is fixed.
- Key terms: reference market and contract month, the party with the pricing right, the pricing period, the minimum quantity per fixing, rules for unpriced quantities, and provisional pricing and settlement arrangements.
- Common reference markets include the Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, London Metal Exchange (LME), CME Group and Intercontinental Exchange (ICE).
In practice
Price fixing lets the parties negotiate price and basis separately. At signing they agree the premium or discount, which reflects quality, location and logistics costs, and leave the absolute price to the futures market. The trader’s profit then comes mainly from the basis, while movements in the absolute price can be hedged with futures.
The management challenge is matching quantities and timing. One contract may be priced in several instalments, many contracts may be at different stages of pricing, and futures positions must be adjusted to follow; pricing on overseas exchanges also involves currency conversion. When pricing instructions, pricing confirmations, provisional invoices, final settlement and futures close-outs are spread across different people, exposure can easily get out of control.
How Tranexio supports it
Tranexio manages single, batch, average, settlement-price and TAS pricing through a single pricing order. Reference markets are maintained as master data, a hedge recommendation is generated automatically once a fixing takes effect, and a pricing exposure ledger and daily report are provided. See Price fixing and price management.