Complex Pricing
By Andrew Schnell and Claudine Trottman
BookRunner®'s v10.2 release includes our complex pricing module which allows users to enter both simple transactions (one location, one price), as well as complex deals that involve:
- multiple locations;
- multiple prices;
- multiple locations and multiple prices;
- tier pricing, and
- formula pricing.
Complex pricing can be modeled for the following transactions:
- Physical Transactions
- Inter-Book Transfers
- Transmission Transactions
- Financial Swap Transactions
Each of these Transaction Input forms contains a header section and a transaction detail section. The header information includes information such as contract start and end date, counterparty, company, DBS code, commodity type and buy/sell flag. The transaction detail record section contains all of the Energy and Pricing information pertaining to the deal entered in the header section. Multiple records can be entered into this detail section if the Complex flag on the header section is enabled.
Each transaction detail record has a mandatory start/end date. The start and end dates cannot fall outside of the start and end dates entered on the header portion. When entering a detail record, the start and end dates of the detail record will default to the start and end dates of the header transaction.
Following are some simple examples of the multiple pricing and multiple location functionality in BookRunner®.
Examples
Example - Complex Pricing
If you entered your basic Physical Commodity deal buying 1000 GJs of Natural Gas a month from Jan 2004 to March 2004, you now have significantly more options when it comes to pricing this deal. The following examples are based on the following price data:
AECO Month Prices (CAD/GJ)
January 2004 - $5.75
February 2004 - $6.25
March 2004 - $7.00
A complex deal can involve a number of different pricing strategies. In this example we'll price the deal using a fixed price of $5.00 CAD/GJ for the month of January, and price the rest of the term of the deal at AECO month prices.
This would mean that for February and March, the deal would be priced at $6.25 and $7.00 respectively. Working with these new numbers the total position of this deal would be: (1 Month * 1000 GJs * $5.00 = $5,000) + (1 Month * 1000 GJs * $6.25 = $6,250) + (1 Month * 1000 GJs * $7.00 = $7,000) = $18,250. Complex deals can also involve Tier pricing and Formula pricing, which are discussed later.
Example - Complex Pricing with Multiple Locations
If you entered your basic Physical Commodity deal buying 1000 GJs of Natural Gas a month from Jan 2004 to March 2004, you now have significantly more options when it comes to pricing this deal. The following examples are based on the following price data:
AECO Month Prices (CAD/GJ)
January 2004 - $5.75
February 2004 - $6.25
March 2004 - $7.00
A complex deal with multiple locations could involve the same pricing strategy as the previous example (Complex Deal), but with different delivery locations. This mainly involves any calculations that utilize the market price, such as the Mark-to-Market valuation. Using the above example we could have the January Natural Gas going to AECO, and the February and March Natural Gas going to NYMEX Henry Hub. This involves the ability to price transactions by varying the location of deals.
For more information about this article, please contact Andrew Schnell at ASchnell@riskadvisory.com or Claudine Trottman at CTrottman@riskadvisory.com .