The document discusses various risk mitigation strategies using derivatives for different groups involved in the natural gas market, including producers, gas processors, pipelines, distributors, marketers, and end users. It outlines strategies like hedging with futures contracts, options spreads like straddles and strangles, and basis trades. The key groups' price risks and how various derivative structures can address them are summarized.

1. RISK MITIGATION BY ‘DERIVATIVES’AMIT KUMAR JAINMBA (OIL & GAS)

3. Long term contracts.Options strategiesSwap Natural gas chainContents

4. Articles / provisions could be broadly classified into four parts :General.Commercial.Technical.Legal. Long term contracts'

5. PreambleDefinitions & InterpretationsConditions PrecedentSales & PurchaseTerm & Termination.Notices.Details of Performance.Joint Coordination Committee.General

6. In common law legal systems, a precedent or authority is a legal case establishing a principle or rule that a court or other judicial body adopts when deciding subsequent cases with similar issues or facts.Precedent

7. A preamble is an introductory and explanatory statement in a document that explains the document's purpose and underlying philosophy. When applied to the opening paragraphs of a statute, it may recite historical facts pertinent to the subject of the statute.Preamble…

8. Sources of Supply.Taxes, Duties & Charges.FinancingQuantities.Invoices & Payment.Transportation.Contract Sales Price.Programming of Deliveries.Additional Matters.Commercial

9. Seller’s & Buyer’s FacilitiesQualityMeasurement and TestsTechnical

10. Transfer of TitleLiabilitiesAmendment & Waiver.ConfidentialitySovereign ImmunityForce Majeure.AssignmentApplicable LawArbitrationLegal

11. It is the doctrine that the sovereign or state cannot commit a legal wrong and is immune from civil suit; hence the saying, the king (or queen) can do no wrong. In many cases, governments have waived this immunity to allow for suits; in some cases, an individual may technically appear as defendant on the state's behalf.Sovereign Immunity

12. It is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot(civil disorder), crime, or an event described by the legal term "act of God" (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract.Force Majeure

13. LATE 1980’S SPOT MARKET 80%1982 SPOT MARKET HARDLY EXISTEDAPRIL 1990, FIRST FUTURE, BY NYMEX1992 SPOT MARKET FALL TO 35%-40%DERIVATIVES HISTORY IN NATURAL GAS MARKET

14. LONGCALL PUTSHORTCALLPUTOPTION’S

15. LONG PUT POSITION

16. SHORT PUT POSITIONPAYOFFOPTION PREMIUMSTRIKEUNDERLIER VALUE

17. SHORT CALL POSITION

18. LONG CALL POSITIONPAYOFFOPTION PREMIUMSTRIKEUNDERLIER VALUE

19. OPTION SPREADAn option spread is a position comprising two or more options on the same underlie.Some spreads have standard namesStraddleStrangleCollarCall spread(Bull spread)Ratio call spreadPut spreads(Bear spread) Ratio put spreadButterfly spreadCartwheelWrangleCalendar spreadOTHER STRATEGIES

20. A straddle comprises a put and a call with the same expiration and struck at the same price—usually at the money.Long Short Straddle

21. Long StraddleHelpful when market is too much volatile.Short StraddleHelpful when market is low volatile.A strangle is similar to a straddle, but both options are struck out of the money. For this reason, a long strangle is cheaper than a long straddleStrangle

22. Long StranglePUTCALLless likely to be profitable.

23. It requires a larger move in the underlier to be profitable.A butterfly spread is a long strangle with a short straddle.Butterfly Spread

24. A collar (or fence) is a spread comprising a long (short) call and a short (long) put, both out-of-the-money and for the same expiration. The strikes can be chosen so that the purchase (sale) price of the call exactly offsets the sale (purchase) price of the put so the spread is a costless collarCollar

25. Costless CollarCALLPUTWhen you are sure that price will rise in future A call spread (also called a bull spread) comprises a long call at one strike price and a short call at a higher strike price. Both options are for the same expiration.Call Spread (Bull Spread)

26. Cont…It has limited upside potential, but income from selling the high-strike call offsets the cost of purchasing the low-strike call.A ratio call spread is a call spread in which the low and high strike calls are not bought and sold in equal proportions.Call Spread Ratio

27. High strike puts are purchased and low strike puts are sold.Put Spread (Bear Spread)

28. A ratio put spread is a put spread in which the low and high strike calls are not bought and sold in equal proportions.Ratio Put Spread

29. Wrangle: A long (short) wrangle is long (short) both a ratio call spread and a ratio put spread. For example, puts might be struck at 90 and 100 with calls struck at 100 and 110.Cartwheel: A cartwheel is long (short) a ratio call spread and short (long) a ratio put spread.Calendar spread: A calendar spread is a long-short position is two calls or two puts. Both options have the same strike, but they have different expirations.

33. Let's look more specifically at some of the ways futures and options are used to address the needs and risks of six important groups: Producers (ONGC, NIKO)Gas processors(ONGC, GAIL)Interstate pipeline companies(GAIL)Local distribution companies (or LDC’s)(IGL) Marketers (HPCL, BPCL)End-users(INDUSTRY, DOMESTIC)According to chain…

34. Producers

35. Natural gas and propane are also likely candidates for a market-related spread since natural gas processing is the major source of propane production.“Frac” spread…The two most popular ratios used to create a balance heating value position are a 3:1 or 5:2 propane to natural gas spread.Gas Processors

37. Inter market spreadInterstate pipeline company

38. Price riskInter commodity risk Local Distribution Companies

39. Assume a marketer has purchased gas from a producer but has not yet struck a deal with any buyers. The marketer is concerned that prices may fall before he can sell the gas, so he sells futures to lock in his sale price.A marketer has agreed to sell natural gas to a chemical company at the spot price plus a transportation charge and marketer's fee. The marketer has not secured supplies, and is concerned that the market may tighten, forcing him to buy at higher prices. He buys futures to lock in his purchase price.Marketers

40. Protecting against sharp price spikesProtecting against falling electricity pricesFixing short-term fuel costsLocking in an attractive spot priceHedging storage gasEnd Users

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