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How are DFBs of things like oil priced when there is no futures market for them?


Guest PandaFace

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Hey - so let me answer in two parts. First by showing you this link and the below image, and secondly by giving a more detailed overview of the associated charges on this. The detailed example of overnight charges is a little dated (with the oil price) but should still provide clarity.  https://www.ig.com/uk/commodities

 

 Let me know if I have misinterpreted your question... 

 

2018-04-18 15_24_18-Commodity Trading on Global Commodities Markets _ IG UK.png

 


1) The formula for calculating the Overnight Basis Adjustment is as follows: 

Overnight Basis = (P3 – P2)/ (T2 – T1) 

T1 = Expiry date of the previous front future 
T2 = Expiry date of the front future 
P2 = Price of front future 
P3 = Price of next future 

For the below explanation we will call the undated futures contract price 'P'. 

This formula therefore takes the difference between prices of the two futures contracts used and divides this by the number of days between the expiry dates of both futures contracts. 

If the slope of the futures curve is upwards sloping you would see a negative overnight funding adjustment posted to your account. If it were downward sloping, you'd expect to see a positive one. 

In this case, the US Crude futures curve is upwards sloping. 

The best way to think about why this is a negative adjustment when you have a long position is by splitting the difference in the price of the futures contracts into individual days. This is done by using the above formula. As the undated contract moves up the futures curve from P2 towards P2, you'd expect P to rise by the same number of points as the daily basis adjustment, all things equal. 

For instance, at the time of writing the current price difference between the MAR-15 and APR-15 US Light Crude contracts is around 62 points and the time difference is 31 days. As such the basis adjustment will be: 

(2930 - 2868) / 31 = 62 / 31 = 2 points per day. 

As such, you'd expect P to rise by this amount each day, all things equal. On the flipside, if you had a short position on this market you'd see a positive adjustment on your account to compensate for price P's movement up the futures curve from P2 to P3.

2) The formula for calculating the IG Annualised Cost is as follows: 

This cost forms part of the adjustment if you are holding the undated contract through 22:00 UK time and has an IG admin fee of 2.5%.

The formula for this is: 

Price x 2.5 % / 365 

Where P again represents the price of the undated contracts at 22:00 UK time. For instance: 

For example 2930 x 2.5 % / 365 = 0.2

3) These two points adjustments are added together.

In the above example, adding these together gives a value of around 2.2 which is the rough charge for the position. You then do 2.2 x Bet Size. There will be a larger value paid on Friday due to the weekend. These adjustments are variable so if you wish to confirm the exact values each day please give us a call.

If you are looking to hold an exposure to US Oil over the longer term you may want to consider holding one of our futures contracts as there is no basis adjustment or IG admin fee posted to the account each night. 

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Guest PandaFace

Yeh that’s what I meant. Thanks for the detail.

 

Rereading my question I can see what you were thinking, and thanks for the help, but I meant more as if there wasn’t an underlying cash price as there is when there is the future market.

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