Page 168 - DCOM510_FINANCIAL_DERIVATIVES

Unit 10: The Trader Workstation

To complete the spread transaction, the refiner buys back the crack spread by first Notes
repurchasing the heating oil futures he sold in May. Since they now trade at 163.7370/bbl,
they cost him 84¢/bbl. more than he sold them for. But he also sells back the crude oil
futures he purchased in May. Since crude oil futures are trading at $137/bbl. It earns him
$3.00/bbl. more than he paid for them.
His gain on the spread is therefore $ 3.16. It is calculated as $3.00 gain on crude oil futures
minus the 84¢ loss on heating oil futures. Had the refiner been unhedged, his margin
would have been limited to a gain of $ 26.74 gain he had in the cash market. Instead,
combined with that gain, his final net margin with the hedge is $28.9.

Table 1: Financial Impact of Cash and Futures

Month Cash Futures Financial Impact Financial
from Cash Impact from
Futures
May - Sell Crack Spread
Buy Aug Crude ($134.0000)
futures
Sell Sept heating oil $162.9012
Futures
Gain / loss $28.9012
July Buy Crude oil @ ($137.0000)
$137/bbl
Sell heating oil $163.7370
@163.7370
Net Gain/loss $26.7370
Buy Crack Spread
Sell Aug Crude $137.0000
futures at $137
Buy Sept heating ($163.7370)
oil futures at
$163.7370
Gain / loss ($26.7370)
Net futures $2.1642
Gain/loss
Cash refining
margin without
hedge
Final Final net margin $28.9012
with hedge

Question:
Analyse the case and write down the case facts.

Source: Kulkarni B. (2011). “Commodity Markets & Derivatives”. Excel Books.
10.5 Summary

 The trader workstation is the terminal from which the member accesses the trading system.
Each trader has a unique identification by way of Trading Member ID and User ID through
which he is able to log on to the system for trading or inquiry purposes.

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