Source: https://de.scribd.com/document/133605444/Converting-Swap-to-Futures
Timestamp: 2019-08-19 05:07:56
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Converting Swap to Futures | Swap (Finance) | Futures Contract
ICE was the first to initiate converting commodity swaps to futures in August 2012. The conversion took place in October 2012. This article explains the technicals involved in covering a swap into a future and how they are similar and not so similar. This article appeared in The Edge, Malaysia on Sept 10, 2012.
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Regulators win as ICE converts swaps to futures read the Thompson Reuters Westlaws headline on Aug 6. The Intercontinental Exchange (ICE) had announced that all its over-the-counter (OTC) cleared energy swaps would be converted to futures contracts from January 2013. A cleared swap is a term introduced in 2009 as part of an effort to standardise the OTC derivatives in order to bring them on to exchanges, and be subjected to markto-market and margining rules. Cleared swaps are swaps that are traded and settled with the exchanges. Hence, when a party enters a cleared swap, the other side of the trade is the Exchange. Once a standardised swap trades on the exchange, they quite resemble futures. In this article, I show how a swap can be converted into futures. The trade is chosen from one of the trades published by the CFTC (the U.S. Commodity Futures Trading Commission) in the U.S. Federal Register in Nov 2010. The Swap We have a fixed for floating WTI (West Texas Intermediate) Crude Oil swap with features shown in Table 1. This swap will have cash flows as shown in Chart 1, with Party A paying a fixed rate of $80 per barrel for 100,000 barrels every month and receiving the floating rate for 100,000 barrels each month. The floating rate is the settlement rate of the one-month futures expiring on the 22nd of the preceding month. Table 1
Chart 4 Converting the swap into futures
The rounded number of futures contracts to approximate the swap notional results in an economically equivalent future. However, as observed in Chart 4, the term of the derivative is now lengthened to Aug 22. This will alter the cash flow profile and valuation of the swap that will be converted into futures. The hypothetical cash flows for valuation are illustrated in Chart 5 and Chart 6. We see that the same Feb, Mar, Apr and May futures prices used in both charts to represent the floating rates. However, the timing of the cash flows is not the same. We also see that the converted futures rely on further month future prices (June, July and August), which were not applicable in the swap. This results in varied cash flows that will give different valuations. Chart 5 Projected cash flows from the swap
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