PRICEMEC - Pricing Mechanisms

What is

The holder of a PM is a CLI .T account.

FX accumulator static data is maintained, using the View button on the toolbar. The View feature also enables access to a full Position analysis including TCC and FX accumulators

A FX accumulator is similar but different to an OTC Option and the TRS feature 'Process Accumulators' is used to final execute these accumulators. When on the grid of FX accumulators, right-click features enable 'In-The-Money' and 'Open Position' reporting

Specific FX rates are maintained in OTHFXR; these are used to determine the creation of call/put options in relation to the Knock-Out price. Hivedome will configure OTHFXR (ctrl85) with parameters of target FX currency and which currencies need to be maintained.

This procedure is also used to maintain Futures Accumulators, Bonus Repricing Contracts and Swaps. There are TERM processes to execute / complete the instruments i.e. Exchange for Swap, Exchange for Swap Other Currency, Reverse Exchange for Swap, Convert Accumulators. These instruments are associated with a paper contract e.g. Sugar NY11 to utilise their underlying Futures and Option prices for executing the performance of the instruments. To provide a Mark-To-Market analysis, the instrument prices need to be entered in PRICEMEC i.e. there is NO price collection sub system available in ITAS. There is a help topic 'Pricing Mechanisms' that provides a more complete description of the different procedures that exist in ITAS.

There are views/reports for Mechanism Status and Exposure History; the grid/views help? provide the detail explanation of their content.

Tech Note: ctrl85_type = 1 determines which OTHFXR rates are to be used by PRICEMEC.

Pricing Mechanism Overview

· Pricing Mechanisms/Pricing Pools are structures used to provide a raw sugar purchase price to growers in Australia

· Growers will elect to commit some or all of their expected production to various mechanisms taking into account that the production might not meet or may exceed expectations hence the need for a Production Risk mechanisms which does not require committed production

· There are different types of Pricing Mechanism and flexibility as to what activities can be undertaken are controlled by the type

· Pricing Mechanisms run for a season and when complete a grower price can be calculated for the season

· Pricing Mechanisms are assigned a quantity and the futures, structures and fx cover used to cover the Exposure Profile and the physical trading undertaken using the pool sugar will determine the grower price

· Benchmarks are added to the Pricing Mechanism to ensure that futures and fx are covered within parameters

· The declared production (not the production risk pool as the quantity by implication is variable) is apportioned over deliverable months for hedging purposes. This is often applied in a 1:2:2:1 ratio across 4 deliverable months, reflecting the expected peaks of the production

· A Pricing Mechanism can be valued at any time using the Pricing Mechanism reporting suite. Standard valuation processes are used for fx and futures. OTC structures may be valued using the received bank market value or on an ‘in-the-money’ basis

· The status of a Pricing Mechanism can be viewed at any time. The status provides information on the required cover and cover so far

· The AAA value (Allocation Account Amount) is derived from the physical trading of Australian sugar. The price per tonne of the AAA is applied to all of the other Pricing Mechanisms as the Australian Sugar being sold will not be linked back to a specific Pricing Mechanism. The AAA is treated as a Pricing Mechanism in order to assign its value and apply cover but it is not a real mechanism to which growers can allocate production

Configuration for operation of PRICEMEC

· PRICEMEC (L01/3)

· Although Pricing Mechanisms are Client .T accounts they can not be maintained in CLI or CLIBULK

· Ctrl20_pricemecs controls the availability of Pricing Mechanisms in TERM (prompt validation), TRS (prompt for cover month)

· The import of Swaps in BRKIMPORT is enabled if ctrl20_priemecs is set

· OTC structures can be maintained in TERM if the user has TERMEFS privilege

· OTC structures can be settled in TERM if the user has TERMEFS privilege and OTC structures exist

· FX Accumulators may be processed in TRS if they exist on the database

Pricing Mechanism Valuation

· The Pricing Mechanism code (an ITAS client .T account) will be maintained as the House Account on exchange traded Futures and Options to enable the value of the Futures and Options to include in the value of the Pricing Mechanism

· The Pricing Mechanism code will be maintained as the Account on FX deals to enable the value of the FX deal to be included in the value of the Pricing Mechanism.

· Swaps, Accumulators, Bonus Repricing Contracts and FX Accumulators can be maintained against a Pricing Mechanism. These will generally be valued using the Bank Valuation which is entered against the structure in TPRICE

· The OTC structures can be maintained directly against the Pricing Mechanism in the PRICEMEC application

· The exotic structures can be converted into exchange traded instruments at expiry

· The value and resulting grower price of a Pricing Mechanism will include the value of the Hedge Position (Mark to Market Value of Futures, In the Money Options, Swaps (treated as Futures for valuation), Accumulators, BRCs, Option Premiums and Cash Settlements) and the FX Position (Mark to Market Value of FX deals, Accumulators, Currency Option Premiums)

· The Gross Pool Price comes from the AUD value of the Pricing Mechanism divided by the nominated Pricing Mechanism Tonnes with the IPS factor applied to result in a AUD/Tonne IPS price

OTC Structures

· This includes Options, Swaps, NY11 Accumulators, Bonus Repricing Contracts, FX Accumulators. TOPEN reports all these instruments except FX Accumulators.

· All structures can be maintained independently of Pricing Mechanisms except FX Accumulators

· The Profitability of a structure which is used in the Pricing Mechanism valuation is entered in TPRICE. Negative values indicate a loss to the operating company

· BRCs and Accumulators are maintained as instruments until expiry. An OTC Option is created at inception for these structures

· At Expiry Swaps and BRCs are converted into Futures trades using the ‘Exchange for Swap’ process in TERM

· The conversion can be in bulk where a single Future trade is generated for the conversion of several instruments using a weighted average price. Checks are carried out to ensure consistency of data across the instruments being bulk settled

· Accumulators are converted into Futures by using the ‘Convert Accumulators’ function in TERM

· Exercising an OTC option leads to the creation of a Swap which can, in turn, be converted into Futures trades using the ‘Exchange for Swap’ process

· OTC options are created using a code set up in TCCM which is flagged as an OTC option

· BRCs are reviewed as part of the overnight process to ensure that of the barrier is breached the BRC price is adjusted

· OTC structures may be included in TOPEN Summary and Detailed reports (nos 1 and 2)

· FX Accumulators may be processed at expiry to create FX deals. The FX deal will be created as an Order to be confirmed in TRS

Tech Note: ctrl85_type = 1 determines which OTHFXR rates are to be used by PRICEMEC.