Pricing and Managing the Liquidity Requirements
of the Futures Portfolio for a Gas Distributor
To manage the risk of a long-term, fixed-price contract with a retail customer, a gas distributor hedges with a corresponding portfolio of futures contracts acquired at an exchange. Each futures contract can be “out of the money” for prolonged periods of time and require additional liquidity to cover margin calls. Since the fixed price gas supply is a service, a gas distributor needs to recover the additional liquidity cost and earn a profit. A gas distributor also has to manage (plan and secure) the liquidity requirements of its aggregated futures portfolio across contracts and other hedges.
The presentation will describe a customizable application, using @RISK simulations, that allows a gas distributor to a priori assess the expected liquidity requirements for each contract and its cost, and to properly price it into the contract. The application allows a gas distributor to correctly assess and update the aggregated liquidity requirements of the whole futures portfolio and to plan accordingly. The application can be further used to analyze and optimize the hedging strategy of the gas distributor.