Can someone explain me a Brent Frontline Swap or link some materials that explains it? I cannot understand it and have not been able to find anything online that I can read to understand the swap.
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I found this here.
Taken from the link:
Brent frontline swaps: A Brent frontline swap is a calendar month derivative that is settled using the ICE Brent futures contract. The swap is financially settled using the closing price on each day of the month, for whichever futures contract is most prompt on each day (with the exception of the expiration date of the front month’s futures contract when the future’s contract referenced is that for the second month). Daily Brent frontline swaps are calculated using mean adjusted values for the number of trading days that each futures contract spends as the front month (with the exception of the front month’s expiry date). This is done by calculating the exact number of trading days within each month, which will vary according to the calendar month.
I have not personally traded or dealt with these in any way before just doing some research after reading your post but is it not just a month average of the prompt Brent contract? So say once the July expiry becomes the front month an average starts and that is your "Brent Frontline Swap" price until the July comes off the board. Then it tracks the Aug contract, etc.
Someone please correct me if I am wrong here.
Yeah that's the only thing available online.
Though I've been able to understand how is the price calculated, I want to know what is being swapped underneath the contract. Or is it just a financial instrument used for risk management purpose.
If it is anything like the swaps I have dealt with in the oil products market (Group 3 diesel basis, Gulf diesel basis), then yeah it is just a risk management tool.
Can confirm, its only a financial risk tool.
You "swap" a fixed price for the pricing described above. Financial v financial.
The actual name Is DFL. If you google that you will get more information I am sure. Its cash settled for sure, since the ICE instrument is cash settled. Why do it? Cause you have a physical asset with daily vol built in and you need to deal with that versus just brent itself.
Id assume anyone who has storage around some north sea asset would use this.
The DFL is different in the sense that the Brent frontline swaps are calendar monthly swaps based on the ICE Brent futures contract.
Probably your best bet: https://institute.cmegroup.com/courses/introduction-to-energy/modules/i…
This is used to hedge something that has daily settlement risk. Lets say you ship 10kbpd on a pipeline that is dependent on the daily settlement (i.e. you agree to buy based on index everyday linked to Brent settlement price for the day) and you are in an agreement to sell 300k barrels at some price. You can hedge daily settlement risk by buying the oil, purchasing something that changes in value vs. the daily settlement prices during that period of time so that your financial hedge offsets any market changes and you are not set on the fixed settlement price of the Brent contract and then delivering at the sales price.
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