On march 31, 2017, soybean options were placed on the list of major commodities, filling the gap in our commodity options, marking a new stage in the expansion of futures-based derivatives from futures to futures and options. Right-of-right trade is an innovative trade model based on the traditional basis of almost price, embedded in options rules。
Trade in rights
The dominant model of almost price would allow the parties to the transaction a degree of flexibility in setting prices at the market, but it would be more demanding in terms of timing, which could result in considerable losses to the enterprise once the timing of the price was uncertain. By agreeing on price ceilings, price floors or at the same time on price floors, trade in rights-based trade adds a double guarantee of “fault of point price” and “price protection” to an enterprise's offer of a single point price. In short, this model offers both an opportunity for firms to price more when more favourable prices are available in the market and to earn higher profits. It also provides bottom-up price security when an enterprise fails to take advantage of the desired price. In particular, trade in rights is divided into three main types, each of which has different operational logic and practical effects, as described below in turn:
The nature of the right-to-trade in the agreed price cap (counted as “the right-to-view” option price) is that downstream firms purchase from upstream firms a false value-to-exceed option, the purchase price = the lower of the future price and the lower of the right-to-view price + the base margin + the right-to-use fee. The specific application of this model is divided into two scenarios:
(a) if the price of the futures is lower than the agreed maximum price (i. E., the option right price) at the time of the entry of the downstream enterprise, the price protection is not triggered, at which point the spot price is the futures price + the base difference + the right price. In this case, upstream enterprises would earn an additional option fee per ton in addition to normal trade gains。
(b) price protection is triggered if the price of futures continues to rise after the contract has been concluded, resulting in the price of futures at the point of the downstream enterprise being higher than the price of the right-to-use option, at which point the spot price is the right-to-right price plus the base margin plus the right-to-side fee. In this situation, downstream enterprises are protected against price protection and are able to purchase at an agreed right price, which would be lower than the market price at the point, while upstream firms sell goods at a right price lower than the market price at the time, but this price is still higher than the future price at the beginning of the contract。
The underlying trade of the agreed price floor (identified as “the right-to-see” right price) is essentially a purchase by the upstream enterprise of a false right-to-see option from the downstream enterprise, the purchase price = the price of the future at the point price and the higher of the right-to-see option price + the base difference-right fee. The application of this model is equally divided into two scenarios:
(a) if the price of the futures price is above the right-to-take price of the downstream enterprise, the price protection is not triggered, and the spot price is: the futures price + the base difference – the right-to-choice price。
(b) if the price of the futures is lower than the right-to-go price at the time of the lower-down business price, the price protection is triggered, i. E. The right-to-go price is: the right-to-go price + the base price. In this scenario, firms upstream of trading rights are protected by price protection, selling goods at the agreed floor of the price, thereby avoiding losses due to a sharp fall in the price; while downstream firms purchase prices that are higher than the average market price at the time of the point, they are still cost-effective compared with the average market price at the beginning of the contract。
3. A combination of both price caps and floors is agreed upon as a combination of the first two models, specifically the point range of the approximate fixed-term price
The value of the lien is lower, the value of the lien is higher
(the price floor/ceiling is equal to the futures price margin at the beginning of the period, and the option value is similar). When the future price at the point price exceeds the upper and lower limit of the zone, the point result is calculated at the price of the upper and lower limit of the zone. Under this model, upstream firms commit to sales price ceilings for downstream firms, downstream firms commit to purchasing price floors for upstream firms, and both provide each other with a significant rise in performance and a significant fall in security and win-win situations. There are three types of applications:
(a) if the price of the futures is within the agreed range at the time the downstream business is charged, the spot price is: the futures price plus the base difference and the traditional base price is calculated in a consistent manner。
(b) if the price of the futures is higher than the agreed maximum price (i. E. The nominal value increases the right-to-use price), the spot price is: the price cap plus the base margin and downstream enterprises receive price protection。
(c) if the futures price at the point is lower than the agreed floor of the price range (i. E., the depreciated value drops the options right price), the spot-off price is: the price floor + the base difference and the upstream enterprise receives price protection。
Practical application
In order to provide a more intuitive understanding of the practical application of trade in rights, the author uses the example of soybean varieties, which are described in detail in relation to specific cases. On 16 may 2025, the bulk business contract m2509 was collected at a collection price of $2899/ton. Some medium-sized soybeans traders in shandong have about 20 customers of downstream feed plants, which have different annual purchases, ranging from thousands to tens of thousands of tons, with an average annual purchase of 230,000 tons per household and a combined total of all customers of about 500,000 tons per year. In order to better serve downstream feed enterprises, meet diversified risk management needs and further expand the distribution channels for soybeans, the trader entered into three trading rights contracts with price caps or floors with different downstream feed plants (2,000 tons per contract and a one-month spot price for downstream enterprises)。
The authors specify the course of the transaction by reference to the contract in which the price cap was agreed: the parties agreed in the contract that the sales price promised by the soybeans traders to the downstream feed plant would be up to a base margin of $3,000/t + $70/t. + $30/t. Of this amount, 70 yuan/tonne base differential represents the average of the local market, while the 30 yuan/tonne entitlement premium is, in fact, the option fee referred to above, which can be calculated using the “option price and volatility calculator” of the network of large firms. The specific location and method of use of the calculator is as follows: access to the network of large businesses, click on the front page, listed varieties, agricultural products, soybean futures/options, options, in the “time-delaying” - options block at the bottom of the page, can be found. When used, the “target” “month” parameter in the calculator will be modified in accordance with the future contract for the point price, the other parameters will remain unchanged for the time being; then the “option price” will be entered at the right-hand bottom of the calculator will be the same; then the test result will be inserted in the left “variant rate” parameter and the other parameters will be modified (“the price will be the future price at the time of the contract, the “execution price” will be the maximum/low limit of the price established in the contract; if the right to the floor/ceiling point in the right trade is valid only at the expiry date, the “pricing model” will choose “european bs” and, if the right to the floor/ceiling point price is available at the time of the transaction before the expiry date, the “pricing model” will select “united states baw” for the “price calculation” button; and the “call” column for the “the theoretical price” line will be the price increase, the theoretical value of the right to drop, or the right reference。
In this case, the price of futures continued to rise during the point price period, until the final point date of 16 june 2025, when the downstream feed plant was unable to complete the spot price below $3,000 per ton. As agreed by the parties in the contract, the transaction was to be completed at the maximum price, i. E. 3,000 + 70 + 30 = $3,100/ton. In the absence of a rights clause, the spot transaction price is 3045 + 70 = $3115/ton based on the closing price of the m2509 contract of 16 june 2025. As a result of the power clause, the plant saved $15 per ton of soybeans. A total of $30,000 in procurement costs, calculated on the basis of 2000 tons of trade, has actually reduced operating pressure。
It's hard to figure out
Right-to-right trade requires a one-to-one search for an intentional counterparty, and when negotiating periodic rights costs, it is easy for the parties to disagree, with demand matching difficulties and operational efficiencies in spot trade. In response to this problem, the authors propose solutions: for firms familiar with in-situ options, the effects of spot-side trade + in-situ options can be achieved in a combination of “ spot-side trade + in-situ options”, essentially using in-situ options as a substitute for in-situ options. Specific operating options can be divided into the following situations, depending on the identity of the enterprise (upstream or downstream) and actual needs (risk avoidance or enhanced profits)。
In the first case, upstream firms, fearing a sharp fall in prices, wish to enter into a trade-in-right contract with downstream firms with the agreed floor of the price, essentially by paying options to downstream firms on the basis of trade in the base margin, buying a bogus value to see a drop in the option, thus locking down the lowest sales price. Corresponding in-situ options are that upstream enterprises can also effectively avoid the risk of a large price drop by buying the corresponding false futures account on a base contract basis。
In the second case, where upstream firms wish to attract downstream customers and increase profits in a market environment where prices are weak, they can enter into a trade-in-the-right contract with downstream firms to agree on price ceilings, essentially by selling a bogus option to downstream to increase returns by charging options. Corresponding in-situ options are that upstream enterprises may increase their profits by selling their corresponding futures accounts at a margin of margin on the basis of a base contract. In particular, if the futures price is higher than the agreed futures price at the time of maturity, the enterprise will be given the right to move, and the holding of the right in this period will be converted into a futures bill of entry at the right price, which will cause a floating loss. While there would be a loss in siloing future manifests, there would be more profits for the spot-end as a result of price increases. Taken together, this effect is equivalent to the completion of the point price at the end of the period when the options are not covered, with the effect of selling the goods at a higher price than at the beginning of the period, with further gains being added at the beginning of the period. If the price of the goods in maturity is not higher than the right to option price, the right to option is invalidated and the right fee is paid at the beginning of the period。
In the third case, downstream firms, concerned with price hikes, wished to enter into a trade-in-right contract with upstream firms to agree on a maximum price, essentially by paying an upstream option, buying a margin to see an increase in the option and avoiding the additional procurement costs associated with higher prices. The corresponding in-situ options are that downstream firms can also effectively avoid the risk of large price increases by buying the corresponding futures account at a margin on the basis of a base contract。
In the fourth case, downstream firms, wishing to increase their profits, could enter into trading rights contracts with upstream firms with agreed floors of prices, essentially by selling false options to upstream firms to increase returns by charging options. Corresponding in-situ options are to reduce the cost of procurement by selling the corresponding false options in futures accounts on a base contract basis. In particular, if the futures price falls by the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to enter the forum and to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right, the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to the right to enter and to the right to the while there would be some loss in the futures overdrafts being prepared, the cost of off-the-shelf purchases would be even lower. Taken together, this corresponds to the completion of the base almost price purchase at the defunct fall right price, adding the option fee charged for the sale of options, and ultimately achieving lower prices than at the beginning of the period. If, at maturity, the futures price does not break the lower options rights price, the depreciated value of the sales will not be converted into a futures bill of rights, and the rights received at the beginning of the period will be secured, indirectly reducing the cost of spot purchases。
Attention
Overall, large fluctuations in commodity prices have a direct impact on business profits and production stability, and trading in rights is an effective tool for dealing with price volatility. In rights-based trade, the cap on agreed prices reduces extreme risk for downstream firms when prices rise sharply, and the bottom limit on agreed prices is for upstream firms when prices fall sharply. In practice, many of the leading industrial chains have consolidated their market position by helping trading partners to avoid these extreme risks. At the same time, it is important to note that, in rights-based trade (i. E., the party that sells the options) can increase profits by charging the options, and even in extreme adverse situations, the conduct is inherently a reasonable low-priced high-value sale — the key is to maintain quantitative control and avoid the risk of excessive trading; if there is no extreme adverse scenario, the right-to-pay will increase profits directly. If the volume of trading with rights exceeds the volume of the firm's control, or if an appropriate trading with rights is not found, there is no need for the enterprise to worry that the objective of alternative trading with rights and risk management and profit gains can be achieved through a combination of “base trade plus in-field options”. (author: state delivery, fan lijun) (end of series)
