Selling PTBF buyer's call

An exporter with access to futures trading who sells PTBF buyer's call can lock in their final price ahead of the buyer's fixation in one of two ways.

Example One 

• On 20 August the exporter sells short 2,000 bags of Prime Mexican October shipment of the same year, PTBF against NYKC December, again of the same year, less 6 cts/lb, FOB Laredo.
• On 20 September they could buy or lock in the physicals at 50 cts/lb.
• The exporter cannot fix as the sale was buyer's call but sees New York is trading at 59.50 cts/lb. They call their FCM and sell 8 lots December for their account at 59.50, giving them an FOB value for the physicals of 53.50 cts = a profit of 3.50 cts/lb.
• On 1 October the buyer fixes the contract by buying 8 lots December at 52 cts/lb. The contract is now fixed at 46 cts/lb FOB. This leaves the exporter a loss of 4 cts/lb on the physicals that had been bought at 50 cts/lb FOB.
• On the futures side the exporter shows 8 lots sold at 59.50 cts/lb against the buyer's purchase of 8 lots at 52 cts/lb. The buyer gives up their futures to the exporter, resulting in a gain for them of 7.5 cts/lb on the futures against a 4 cts/lb loss on the physicals, leaving the original profit of 3.5-cts/ lb.

Example Two 

• On 20 August the exporter sells short 2,000 bags of Prime Mexican October shipment (same year) PTBF against NYKC December (again same year) less 6 cts/lb, FOB Laredo.
• On 1 October the buyer fixes the contract by buying and transferring 8 lots December NYKC at 52 cts/lb to the exporter. The physicals are now fixed at 46 cts/lb FOB.
• As the exporter has not yet bought the physicals they remain long on the futures instead.
• On 15 October the exporter buys in the physicals to be able to ship on time. The market has risen and they must pay 50 cts/lb, thus losing 4 cts/lb.
• They sell the December futures at 59.50 cts/lb, or a profit of 7.5 cts/lb, leaving the same profit as in example one, even though in this case the physicals were bought after the fixation.

Both examples yield the same result because the assumption is that the differential (price difference between futures and physicals) remained the same. In neither case does the direction or extent of the general market movement matter, but had there been an unexpected shortage of Mexican Prime then of course the differential would have moved against the exporter and they could have lost money because of this.

This basis or differential risk exists regardless of whether one sells PTBF buyer's call or seller's call - it cannot be hedged in the futures market (although, given the huge number of PTBF trades it is not inconceivable that this could change in the future).