Why do natural gas basis traders look at discounted and undiscounted position managers when trading? Having a hard time grasping the logic/reasoning around futures discounting
| +9 | Natural Gas Analyst Path to Trader | 0 | 1d |
| +8 | RBC S&T 27' | 15 | 58m |
| +6 | CRE to S&T lateral opportunities | 4 | 1d |
| +6 | Exiting Sell Side FI Trading | 1 | 1d |
| +6 | EM Resources / Study Material | 0 | 1h |
| +3 | S&T Outlook and Pivot from Buy Side | 1 | 22h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Bump
Bump
I trade basis and have no clue what you’re talking about.
lmao this^
Not all firms use discounting, and this wasn't really a thing when interest rates were low a few years ago but it can be now.
basis traders at large shops will have discounting/rate pnl in their books
When you discount the future price by the implied interest rate curve you are trying to examine the futures price without the impact of rates. For example, if the future expiring in 1 year went up in price 0.25% but 1 year interest rates went up 0.25%, a trader might conclude that the price change was purely due to activity in interest rate markets.
However, stuff like this is typically more academic than practical because in commodities there are so many knock on effects of any one pricing variable changing
From my experience all traders and originators base price based solely on supply and demand, the weather, and knowing where the physical product is currently stored/moving to (supply chain). Everything else is just noise and most traders make bets based on fundamentals and common sense from my experience. I work at an oil major though so we operate differently compared to pure midstream firms.
I'm not sure what you're talking about? Are you talking about the cost of carry associated with natural gas and how they take advantage of steep contangos?
There is a risk management concept around weighing deferred positions lower relative to the front according to historical correlations in order to summarize what the equivalent exposure is as if every position was in the front month. That’s done in order to summarize (very roughly and anyone knows that there are problems with it) what the exposure is in terms of one single number.
Very helpful, thank you
Great answer, the way the question was phrased made it hard to ascertain. This logic is also used by exchanges to figure out what your limit exposures are (even HH margin).
If I take out 5 years of pipe, and only the front 2 years are liquid sometimes one may need to trade more front to deal with the risk in the backs as things are moving. Well when one hedges 150% of of an assset in the front and leave the back unhedged wee bit of risk added there. Similarly if one leaves the front open as they close the back spreads.
Question was def asked in a weird way but i think oil_quant seemed to explain what I think you're asking. Would be for like what marcellus said if you were doing a "stack and roll" on a less liquid product that's rarely traded further out the curve. You stack the front more liquid months and roll them out as liquidity provides. If you calculate it for every further out exposure along the curve you'll arrive at "one" number as oil_quant said as if all positions were in the front month. In short it's a number used for a quick and dirty method of hedging long dated exposures in illiquid products.
Excepturi id cum deserunt doloremque sit quia est. Optio reprehenderit ut enim et id et. Eum impedit ut est tenetur ex. Inventore corporis omnis est rerum. Recusandae consequuntur impedit molestiae dicta dolor.
Et et dolor facilis odio qui corrupti consequuntur. Et temporibus consequatur facere sit libero. Consequuntur consectetur est aspernatur facilis dolores. Aut sit recusandae repudiandae alias quam et quas qui.
Magnam deserunt optio nesciunt repudiandae deserunt rerum ipsa. Labore magnam dolor vel.
Veritatis eius dicta iste. In et ut praesentium quibusdam deserunt nostrum earum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...