EEX Industrial Wood Pellet Futures allows buyers and sellers of physical wood pellets to manage price risk through financially settled futures contracts. The futures contracts use the Argus CIF ARA spot index price as the settlement price. This links the financial futures market to the physical spot market. Hypothetical examples show how a buyer or seller could establish a hedge position in the futures market when conducting physical trades in the spot market to manage their price risk over the delivery period.

1. EEX Industrial Wood
Pellet Futures
Linking physical markets with
financially settled futures
Robert Seehawer
Leipzig 28.06.2018

2. Price chart Wood Pellets spot market
EEX Wood Pellets
Futures use Argus
CIF ARA spot index
as settlement price for
the monthly futures
contracts
• How risk management tools (EEX Wood Pellets futures) are designed to actively
manage price risk?
• How Argus values are used for settlement of financial future?

3. 100,0
110,0
120,0
130,0
140,0
150,0
160,0
170,0
Jan-2016 Mrz-2016 Mai-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mrz-2017 Mai-2017 Jul-2017 Sep-2017 Nov-2017
Determining the monthly spot index value
07 June 135.01 $/t
14 June 140.86 $/t
21 June 141.42 $/t
28 June 140.27 $/t
Average 139.39 $/tWood Pellets Month Index (average)
Wood Pellets Spot Index (weekly)
Thu Fri Mon Tue Wed Index
Trades,
Bid/ offer,
Survey
Trades,
Bid/ offer,
Survey
Trades,
Bid/ offer,
Survey
Trades,
Bid/ offer,
Survey
Trades,
Bid/
offer,
Survey
For
delivery
within next
90 days

4. Hedging simulation
Modelling of hypothetical hedge with historical data
Assumptions
• Perspective of a wood pellets consumer/ buyer
• December 2016 – annual planning of consumption
for Q3-17
• Delivery need of 20,000 tonnes of Wood Pellets
• Hedge of market price risk by purchase of June 2017 futures
covering next 90 delivery days

5. 100,0
110,0
120,0
130,0
140,0
150,0
160,0
170,0
Jan-2016 Mrz-2016 Mai-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mrz-2017 Mai-2017 Jul-2017 Sep-2017 Nov-2017
Delivery
window
?
Price June
2017 Futures
Assessment of the futures price at trade date
Market price
Cost of Carry
117 $/t
Futures price
Wood Pellets Spot Index (weekly)
114.73 $/t for delivery
within next 90 days
W Delivery
window
7 Dec 2016

6. Shift of the Futures price curves
100,0
110,0
120,0
130,0
140,0
150,0
160,0
170,0
Jan-2016 Mrz-2016 Mai-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mrz-2017 Mai-2017 Jul-2017 Sep-2017 Nov-2017
8 Feb 2017 116 $/t
8 Mar 2017 124 $/t
12 Apr 2017 128.25 $/t
10 May 2017 131 $/t
10 May 2017
12 Apr 2017
8 Mar 2017
8 Feb 2017
Wood Pellets Futures price
Wood Pellets Spot Index (weekly)

7. 100,0
110,0
120,0
130,0
140,0
150,0
160,0
170,0
Jan-2016 Mrz-2016 Mai-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mrz-2017 Mai-2017 Jul-2017 Sep-2017 Nov-2017
What if…?
Wood Pellets Spot Index (weekly)
8 Feb 2017 ?
8 Mar 2017 ?
12 Apr 2017 ?
10 May 2017 ?
8 Feb 2017
8 Mar 2017
12 Apr 2017
10 May 2017
7 Dec 2016

8. 117
115
116
124
128,25
131
135,01
140,86 141,42
140,27
110
115
120
125
130
135
140
145
Buyer payoff profile for June 2017 Futures position
Purchase of 200 futures at 117 $/t
Hedge position value 2,340,000 $
139.39 $/t
Wood Pellets Futures price
Wood Pellets Spot Index (weekly)
Date 07. Dez 11. Jan 08. Feb 08. Mrz 12. Apr 10. Mai 07. Jun 14. Jun 21. Jun 28. Jun Final
Trade price $/t 117 117 117 117 117 117 117 117 117 117 117
Settlement price $/t 117 115 116 124 128,25 131 135,01 140,86 141,42 140,27 139,39
Change $/t 0 -2 -1 7 11,25 14 18,01 23,86 24,42 23,27 22,39
Contract volume t 100 100 100 100 100 100 100 100 100 100 100
Position [+/-] +200 +200 +200 +200 +200 +200 +200 +200 +200 +200 +200
Variation margin $ 0 -40.000 -20.000 140.000 225.000 280.000 360.200 477.200 488.400 465.400 + 447.800

9. Procurement – buyer’s view
Procurement of physical Wood Pellets in the market
• Beginning of June 2017
• Purchase of 20,000 tonnes of Wood Pellets for delivery in the next 90 days
(Q3 2017)
• Physical position in spot market purchased with a price @ 139.5 $/t
Hedge position
value
20,000 t * 117 $/t 2,340,000 $
Procurement
payment
20,000 t * 139,5 $/t - 2,790,000 $
Futures cash
settlement
20,000 t * 22,39 $/t + 447,800 $
Total payment 2,342,200 $
-40
-20
0
20
40
87 97 107 117 127 137 147
Buyer payoff profile net position
Aggregated Position Procurement Hedge

10. 117
115
116
124
128,25
131
135,01
140,86 141,42
140,27
110
115
120
125
130
135
140
145
Seller payoff profile for June 2017 Futures position
Sale of 200 futures at 117 $/t
Hedge position value 2,340,000 $
139.39 $/t
Wood Pellets Futures price
Wood Pellets Spot Index (weekly)
Date 07. Dez 11. Jan 08. Feb 08. Mrz 12. Apr 10. Mai 07. Jun 14. Jun 21. Jun 28. Jun Final
Trade price $/t 117 117 117 117 117 117 117 117 117 117 117
Settlement price $/t 117 115 116 124 128,25 131 135,01 140,86 141,42 140,27 139,39
Change $/t 0 -2 -1 7 11,25 14 18,01 23,86 24,42 23,27 22,39
Contract volume t 100 100 100 100 100 100 100 100 100 100 100
Position [+/-] -200 -200 -200 -200 -200 -200 -200 -200 -200 -200 -200
Variation margin $ 0 40.000 20.000 - 140.000 - 225.000 - 280.000 - 360.200 - 477.200 - 488.400 - 465.400 - 447.800

11. Delivery – seller’s view
Delivery of physical Wood Pellets in the market
• Beginning of June 2017
• Sale of 20,000 tonnes of Wood Pellets for delivery in the next 90 days
(Q3 2017)
• Physical position in spot market sold with a price @ 139.5 $/t
Hedge position
value
20,000 t * 117 $/t 2,340,000 $
Delivery
receivable
20,000 t * 139,5 $/t 2,790,000 $
Futures cash
settlement
20,000 t * - 22,39 $/t - 447,800 $
Total receivable 2,342,200 $
-40
-20
0
20
40
87 97 107 117 127 137 147
Seller payoff profile net position
Aggregated Position Hedge Sale

12. Summary
Two transactions required
• Financial futures trade
• Physical spot market trade
Index value
• Index used to settle financial futures

13. Thank you for your
attention!
Robert Seehawer
+49 341 2156 – 525
robert.seehawer@eex.com