9.2.1-HEDGING AND OTHER OPERATIONS-THE PRINCIPLE OF TRADING PTBF
The principle of trading PTBF
The trading described in 09.01 assumed that buyers and sellers worked with fixed or outright prices. It also focused on the primary market or price risk, not on the basis risk or differential risk that cannot be offset by hedging. In recent years more and more physicals have been traded at prices that are to be fixed against the futures markets: the PTBF contract.
When the market outlook is very uncertain, many traders and roasters are reluctant to purchase physical coffee outright on a forward basis. The international trade has therefore developed a system of selling coffee without specifying a price for it, i.e. at
a price to be fixed (PTBF)
. A relevant delivery month of the futures market is chosen: its price at a given moment will determine or fix the price of the physicals contract. If the quality of the physicals is worth more or less than the quality on which the futures contract is based, the price stipulation will read (for example) 'New York "C" December plus (or minus) 3 cts/lb', or 'London robustas November plus (or minus) US$ 30/ton': the plus
3 or plus 30 is the differential
The contract constitutes a firm agreement to deliver and accept a quantity of physical coffee of a known quality and under established conditions. These conditions are based on the quotation for the specified delivery month of the futures market at the time of fixing, plus or minus the agreed differential. The advantage to the buyer and seller is that each has secured a contract for physical coffee, but the price remains open.
In other words the buyer has now separated the operational decision to secure physical coffee (thereby avoiding problems of shortages), from the financial decision to fix the cost of that coffee, which they prefer to postpone. This arrangement provides flexibility for both buyer and seller. The obligation to deliver and accept physicals now exists but as the price remains open, both parties can continue to play the market. The system of PTBF has been honed to such an extent that prices are sometimes fixed only when coffee is delivered to the roaster's premises.
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