Question

Suppose that a one-month, 1,000-barrel NDF on WTI crude oil is priced at $40.66/barrel. The spot (cash) price for WTI is $40.00/barrel. Suppose that the trader quoting these prices requires no collateral (performance bond) for entering into this NDF contract, and never marks it to market. If you are a speculator and enter into this NDF (taking a short position):

(i) What will be your cash-flow today?

A. Nothing B. minus $40,000 C. plus $40,000 D. None of the above

(ii) What will be your cash-flow in a month?

A. Nothing ($0) B. minus $40,000 C. plus $40,000 D. None of the above

(iii) Will you face any cash-flow due to entering into this NDF, at any point in between?

A. Yes B. No C. Can’t tell

(iv) If the WTI spot price at the expiration of this NDF is $42, what gain or loss will you have made?

A. $2/barrel gain B. $2/barrel gain minus the interest cost and the cost of storage C. minus $1.34/barrel D.minus $1.34/barrel plus the interest cost and the cost of storage E. Can’t tell, it depends on whether there is a convenience yield on WTI crude F. None of the above (if so, explain)

Answer 1

NDF or Non -Deliverable Forward contract is a short term cash settled contract. The actual delivery of good will not take place in such contract. Rather on the settlement date the profit and loss will be calculated based upon the difference between NDF agreed rate and the spot rate at the time of the settlemet.

As there is no actual delivery of goods , hence it is named as Non -Deliverable Forward contract

Following are the features of the NDF aggrement-

• No initial cash flow required at the date of agreement.
• No actual delivery of goods or commodity
• the gain or loss will be decided based upon the difference between NDF agreed rate and the spot rate at the time of the settlemet.
• As there is no initial outlay of cash and no actual delivery goods, henec there will be no interest cost, storage cost and convience yield.

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(i) What will be your cash-flow today?

Correct Option-A. Nothing

(ii) What will be your cash-flow in a month?

Correct Option-D. None of the above

Reason-

Assuming the spot rate after one month be $40/ barrel and NDF quoted price is $40.66/ barrel, hence the trader having short positon or sell position will have a profit of $40.66-$40.00 = $0.66 per barrel.[ because the market price is $40 and the NDF rate is $40.66. hence there is profit is Short position or sell position]

henec total cash inflow after 1 month for 1000 barrel = 1000*$0.66 = $660

(iii) Will you face any cash-flow due to entering into this NDF, at any point in between?

Correct answer-B. No

(iv) If the WTI spot price at the expiration of this NDF is $42, what gain or loss will you have made?

Correct answer-C. minus $1.34/barrel

Reason-

Because the market price is $42 and the NDF rate is $40.66. hence there is loss is Short position or sell position in case the maret price is more.

In a normal term we can say that instead of selling @$42/ barrel in market, now the trader have to sell @$40.66/barrel as per NDF rate.

hence,

Loss per barrel = $42-$40.66 = $1.34.