ATB Financial - Corporate Financial Services

About ATB Corporate Financial Services

Executive Team

Our Locations

Benefits of ATB Financial

Corporate Lending Solutions

Account & Deposit Management

Investment Solutions

Employee Services

Derivatives

OUR SERVICES
DERIVATIVES
NYMEX NATURAL GAS

Buy Put Option

Description:

The buyer of a NYMEX natural gas put option has the right, but not the obligation, to receive a negotiated fixed price from the seller and to pay them the future settled NYMEX price. In return, the buyer of the put option pays a premium to the seller immediately. In the money put options are automatically exercised and generally settle in U.S. dollars 5 days after the settlement price on the next to last trading day (i.e., penultimate price) is establised. However, both the premium and the option settlement may be deferred to match the cash flow from the physical sale of the natural gas.

Example

A natural gas producer has a contract to sell 100,000 MMBtu’s each month at the Alberta monthly index price. The producer wishes to guarantee their natural gas revenue from this volume for the next 12 months will be at least $725,000 per month plus the difference between the NYMEX and the Alberta index price (i.e., Alberta basis). As a result, they purchase a put option from ATB, whereby each month they have the right, but not the obligation, to receive a fixed price of $7.75/MMBtu and pay the penultimate price of NYMEX multiplied by 100,000 MMBtu’s. In return, they agree to pay ATB a premium of $0.50/MMBtu multiplied by $100,000 MMBtu.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Purchasing a NYMEX put option is an effective risk management strategy when you want to eliminate the potential for a decline in revenue due to falling NYMEX prices, but still retain most of the upside if NYMEX prices increase. In exchange for eliminating the potential downside, you pay a premium to the seller of the option. Using the same example as above, the following table and graph illustrate the impact of a NYMEX put option hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for next year for NYMEX is currently $8.75/MMBtu and ($0.75)/MMBtu for Alberta basis. In addition, we have determined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $6.25/MMBtu for NYMEX and ($1.25)/MMBtu for Alberta basis; and the 5% best case is that actual prices average $12.00/MMBtu for NYMEX and ($0.50)/MMBtu for Alberta basis. In other words, there is a 90% probability that the average forward price for next year for NYMEX will be between $6.25/MMBtu and $12.00/MMBtu and between ($1.25) and ($0.50) for Alberta basis.

Impact of Hedging Strategies on Potential Revenue for the Next 12 months

Hedging Strategy	5% Worst Case Revenue	Expected Revenue	5% Best Case Revenue
No Hedges	$6M (100,000 MMBtu x $5.00 x 12mo.)	$9.6M (100,000 MMBtu x $8.00 x 12mo.)	$13.8M (100,000 MMBtu x $11.50 x 12mo.)
Hedge 100% of Volume	$7.2M (100,000 MMBtu x $5.00 x 12mo. + net option value* (100,000 MMBtu x $1.00 x 12mo.))	$9.6M (100,000 MMBtu x $8.00 x 12mo. + net option value* (100,000 MMBtu x $0 x 12mo.))	$13.2M (100,000 MMBtu x $11.50 x 12mo. + net option value* (100,000 MMBtu x $0.50 x 12mo.))

Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456