Conditional
A conditional is the sale of a product at a price above market value, with a commitment to deliver an additional tonnage to be fixed (of that product or another), and whose fixation will depend on a condition: if its price reaches or exceeds a certain value on a specific date, the price will be fixed at that level.
Conditional
A conditional is the sale of a product at a price above market value, with a commitment to deliver an additional tonnage to be fixed (of that product or another), and whose fixation will depend on a condition: if its price reaches or exceeds a certain value on a specific date, the price will be fixed at that level.
Parts
- A sale at a price.
- A sale to fix whose fixing mechanism depends on a condition.
Parameters
Business at price
- Tonnes: the tonnes to be sold at the agreed price.
- Price: this is the price that will be obtained for the tonnes sold, which is higher than the market price at the time of the deal.
- Delivery month: the month of unloading is agreed
Note: the tonnage committed and the price agreed are fixed from the moment the transaction takes place, regardless of what happens in the future with the values.
Fixing deal with condition
- Tonnage: the tonnage sold to fix is normally the same as the tonnage agreed at price, but can be a multiple of it (one and a half times, double, etc.).
- Condition date: this is the day on which the condition will be assessed to see whether the additional tonnage is fixed or released. The date can be the same as the delivery month or different.
- Condition value: this is the price that will be taken as a parameter to assess whether or not the additional tonnage is fixed. The condition is that at the expiry date the market price is at or above the conditional value. If this is the case, the additional tonnage will be fixed at the value of the conditional, which will therefore be lower than the market value.
- Delivery obligation: it can be agreed that the business to be fixed will not be delivered. In this case: – If the condition does not trigger fixation, the goods are not delivered, and no differences arise. – If the condition triggers the fixation, the value fixed will be lower than the market value. As the goods will not be delivered, the difference in price must be paid: Additional tonnage * (market value – condition value).
Example
a) 100 tt Condicional Soja May-19 250 x 270:
- Sales 100 tt de Soja May-19 250 U$S
- Business to be fixed for an additional 100 tt.
- Condition: If at the end of April the market price is equal to or higher than 270, the 100 tt will be fixed at 270 when the market price is 300. If it is agreed not to deliver the additional tonnes, the seller shall pay the price difference for the tonnage of the additional 100 tt, that is to say, USD 3,000
- If at the end of April the market price is less than 270, the goods must be delivered at a fixed price. If non-delivery is agreed, the commitment will end without any additional payments or charges.
b) 100 tt Condicional Soja May-19 250 x 200 tt a 270:
- Similar to the previous one but now the sale deal is for 100 tt and the condition is for 200 tt. It is double the tonnage.
c) 100 tt Condicional Soja May-19 250 x Soja Nov-19 290
- Same operation, only the conditional is postponed until the last week of October.
d) 100 tt Condicional Soja May-19 250 x Trigo Dic-19 210
- Similar to above but now the condition is on another product.
Example
a) 100 tt Condicional Soja May-19 250 x 270:
- Sales 100 tt de Soja May-19 250 U$S
- Business to be fixed for an additional 100 tt.
- Condition: If at the end of April the market price is equal to or higher than 270, the 100 tt will be fixed at 270 when the market price is 300. If it is agreed not to deliver the additional tonnes, the seller shall pay the price difference for the tonnage of the additional 100 tt, that is to say, USD 3,000.
- If at the end of April the market price is less than 270, the goods must be delivered at a fixed price. If non-delivery is agreed, the commitment will end without any additional payments or charges.
b) 100 tt Condicional Soja May-19 250 x 200 tt a 270:
- Similar to the previous one but now the sale deal is for 100 tt and the condition is for 200 tt. It is double the tonnage.
c) 100 tt Condicional Soja May-19 250 x Soja Nov-19 290
- Same operation, only the conditional is postponed until the last week of October.
d) 100 tt Condicional Soja May-19 250 x Trigo Dic-19 210
- Similar to above but now the condition is on another product.
Notes
- It is important that condition prices are at high levels so that if sold, the value is either profitable or very unlikely to be reached. In any case, an unexpected rise can never be ruled out.
- As it is not known until the last moment whether the conditional will be exercised or not, it is necessary to reserve unsold merchandise. If there is also a commitment to deliver, this should be reserved in the seller’s possession.
- If you want to ensure a worst case scenario of the conditional downside, it is possible to buy a PUT option for the conditional.
- The conditional can be neutralised later by buying a CALL option for the same month as the conditional and with a strike price equal to or lower than that of the conditional. This implies a cost, but in case the market goes down, that cost will be very low.
Notas
- It is important that condition prices are at high levels so that if sold, the value is either profitable or very unlikely to be reached. In any case, an unexpected rise can never be ruled out.
- As it is not known until the last moment whether the conditional will be exercised or not, it is necessary to reserve unsold merchandise. If there is also a commitment to deliver, this should be reserved in the seller’s possession.
- If you want to ensure a worst case scenario of the conditional downside, it is possible to buy a PUT option for the conditional.
- The conditional can be neutralised later by buying a CALL option for the same month as the conditional and with a strike price equal to or lower than that of the conditional. This implies a cost, but in case the market goes down, that cost will be very low.
Advantages
- You can sell at a price above market value.
- It is known at the time of sale how many tonnes remain to be sold.
- If a firm sale order remains at a value regardless of the market value, the conditional price is profitable, or is considered high.
Disadvantages
- The tonnage of the conditional is unsold, i.e. it cannot be taken as a real sale until the conditional is closed.
- If the price rises too much we may be sold below the market price.
- Care must be taken with the tonnage to be committed especially if there are doubts about the total volume that will be available.
Advantages
- You can sell at a price above market value.
- It is known at the time of sale how many tonnes remain to be sold.
- If a firm sale order remains at a value regardless of the market value, the conditional price is profitable, or is considered high.
Disadvantages
- The tonnage of the conditional is unsold, i.e. it cannot be taken as a real sale until the conditional is closed.
- If the price rises too much we may be sold below the market price.
- Care must be taken with the tonnage to be committed especially if there are doubts about the total volume that will be available.
Advantages
- You can sell at a price above market value.
- It is known at the time of sale how many tonnes remain to be sold.
- If a firm sale order remains at a value regardless of the market value, the conditional price is profitable, or is considered high.
Disadvantages
- The tonnage of the conditional is unsold, i.e. it cannot be taken as a real sale until the conditional is closed.
- If the price rises too much we may be sold below the market price.
- Care must be taken with the tonnage to be committed especially if there are doubts about the total volume that will be available.