The products offered by NOREXECO are “Exchange Traded Financial Futures” on pulp indices on NBSK and BHKP.
|Trading Venue||NOREXECO, a regulated market|
|Clearing||European Commodity Clearing AG (ECC), an ESMA authorised CCP|
|Index Provider||FOEX Indexes Ltd|
|Listed Products||Current Month + 5, Current Quarter + 5 and 2 Calendar years|
|Final Settlement Price||Average of FOEX PIX(TM) values of the month for NBSK and BHKP respectively|
|Expiration Day||Last Tuesday of the month|
For more details on the products, see Rulebook Appendix 01 Product Specification and Trading Schedule.
NBSK – PIX Northern Bleached Softwood Kraft Pulp, standard dryness 90 % air dry, standard strength characteristic, brightness 88 and standard ECF/TCF, Price reference CIF North Atlantic or North Sea Port (European Port) denominated in USD. The index price is set before any customer specific rebates.
BHKP – PIX Bleached Hardwood Kraft Pulp, standard dryness 90 % air dry, standard strength characteristic, brightness 88 and standard ECF/TCF, Price reference CIF North Atlantic or North Sea Port (European Port) denominated in USD. The index price is set before any customer specific rebates.
A futures contract is generally a contract between two parties to buy or sell an asset for a price agreed upon today (the futures price) with settlement at a future point, the settlement date. Because the future contract is a function of an underlying asset, a futures contract is considered to be a derivative product. Some futures contracts have financial settlement towards an index, others has physical delivery at a warehouse. The futures traded at NOREXECO are cash settled against an index.
An exchange traded, cleared futures contract with cash settlement is a legal agreement between a buyer (seller), and the clearinghouse partner of the futures exchange in which the buyer (seller) agrees to settle the contract towards an index over the lifespan of the designated financial contract .
The price at which the parties agree to transact is called the futures price. The designated date at which the parties must settle the final amount is called the settlement date.
What is hedging?
Hedging is a risk management strategy designed to reduce or offset price risks.
In essence, when operating in futures markets hedging implies taking a position opposite to a position in the physical market. Hedging is the opposite of speculation – hedgers are NOT trying to gain and make money on the price movements. Hedging is all about seeking to increase predictability of future cash flow, or said in an other way, reduce uncertainty in a future revenue stream as a producer, or future cost for a consumer of a commodity.
Locking, or fixing a price today allows for better focus on planning and business development with minimum exposure to an unwanted business risk. Hedging can vary in complexity from off-setting trade with one counterpart to simple, but efficient entry into a futures contract. But a key take-away is that to maximize shareholder value, all market participants wants to execute their hedges in the environment with the lowest cost (high liquidity/no credit risk) and highest efficiency where multiple market participants quoting bids and offers over the same pre-agreed, standardized contract structure, based on the same rules and regulations.
Long vs short hedge
- A short (or sell) hedge is used to protect against a decline in the future cash price of a commodity, a financial instrument or portfolio. To execute a short hedge, the hedger sells a futures contract. A pulp producer is long pulp and can protect against lower prices by go short in the financial pulp futures market.
- A long (or buy) hedge is undertaken to protect against rising prices. To execute a long hedge the hedger buys a futures contract. A pulp consumer is short pulp and may protect against raising prices by go long in the financial pulp futures market.
Why Hedge with exchange traded and cleared financial futures?
- Reduce risk
- Credit risk removed by clearing
- Price risk removed by taking positions in the futures market
- Access the largest liquidity pool
- Stay anonymous in the market
- For consistent and stable cash flows
- Better determine a sales/purchase price of pulp
- Reduce transaction cost
The NOREXECO futures contracts are cash settled against the FOEX PIX index price in the delivery month making them ideal for hedging.