|
 |
Swaps for Consumers
|
|
FertProCo, a manufacturer of a variety of fertilizer products, is preparing its
annual price catalog for many of its ammonia based products. The
company's customer base demands the ability to buy the products at the
listed catalog price regardless of ammonia feedstock prices. This makes it
impossible for FertProCo to pass on feedstock price increases no matter what
the magnitude. On the other hand, customers don't necessarily expect
lower prices if ammonia feedstock prices should fall; they simply want a
listed price they can count on. To service its customers while protecting its
margins, FertProCo enters into a one-year price swap. The swap effectively
fixes the price of ammonia at $100/ton on a monthly volume of 10,000
tons, or 75% of anticipated monthly catalog sales.
During the life of the swap:
- FertProCo continues to purchase ammonia from suppliers of its choice at
floating market prices.
- On a monthly basis, FertProCo and Enron exchange payments equal to the
difference between the swap fixed price of $100/ton and the floating
price for ammonia.
- For example, if the floating price for ammonia is $105 in a given month,
FertProCo will receive $5/ton on 10,000 tons. However, if the floating price
is $95/ton FertProCo will owe $5/ton to Enron.
- The net effect of combining the swap cash flows with actual purchases
of ammonia feedstock is a fixed price of $100/ton.
- The swap enables FertProCo to publish and stand behind its listed prices
with full confidence that the margin on those sales is largely protected
from fluctuating feedstock prices.
back to Swaps
|
|
|
|
|
