Commodity Position

ORE states that a commodity position represents a position in a single commodity, with a single Underlying node, or in a weighted basket of underlying commodities, with multiple Underlying nodes. The node can be a standalone trade type, CommodityPosition, or a trade component, CommodityPositionData, inside the TotalReturnSwap trade type.

A commodity position is the commodity itself in portfolio form. One trade holds a quantity of a commodity. The price follows the market each day. A basket trade holds several commodities with weights, like one index holding.

The CommodityPositionData node carries the Quantity and the underlyings. Each Underlying node names a commodity, such as NYMEX:CL or ICE:B. A single commodity uses one node. A weighted basket uses several, each with a Weight. The PriceType selects the pricing reference. With FutureSettlement, the position refers by default to today's prompt (lead) future. FutureMonthOffset, DeliveryRollDays, and DeliveryRollCalendar refine which future contract prices the position.

ORE notes that a generic TRS does not support rolling of the future contracts. Today's prompt future can differ from the prompt future at inception. If the initial basket price is not set, the position uses the price of today's prompt future at trade inception. The TRS ignores the roll yield caused by rolling from one prompt future to the next.

A single position value is the quantity times the commodity price. A basket position value is the quantity times the weighted sum of the underlying prices:

V = Q x (Sum over i of Weight_i x S_i x FX_i)

The weights set the basket's exposure to each commodity. Each S_i is the i-th commodity prompt future or spot price. Each FX_i converts from the i-th commodity currency to the first commodity currency. The first commodity currency is the currency of the basket NPV.

• The commodity price of each underlying. It drives the value.
• The FX rate of each underlying's currency to the first commodity currency.
• The basket weights. They set the share of each commodity.
• The quantity.
• The pricing reference, spot or future settlement.

The value moves with the weighted commodity prices. A long position gains when the basket rises. A short position gains when it falls.

The pricing reference decides how the position follows the market. A spot reference tracks the spot day by day. A future settlement reference follows today's prompt future. The prompt future changes as near contracts expire, and a TRS does not accrue the roll yield. The position has no maturity of its own. It continues until the trade is closed.

A customer who holds physical commodity wants its value on the books. A hedge fund wants an index-like commodity exposure in one trade. A bank prices a client's commodity basket position in its portfolio. Inside a total return swap, the position pays the swap's return leg. In ORE Studio a customer books commodity positions to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a basket of two commodities:

<CommodityPositionData>
  <Quantity>1000</Quantity>
  <Underlying>
    <Type>Commodity</Type>
    <Name>NYMEX:CL</Name>
    <Weight>0.5</Weight>
    <PriceType>FutureSettlement</PriceType>
    <FutureMonthOffset>0</FutureMonthOffset>
    <DeliveryRollDays>0</DeliveryRollDays>
    <DeliveryRollCalendar>TARGET</DeliveryRollCalendar>
  </Underlying>
  <Underlying>
    <Type>Commodity</Type>
    <Name>ICE:B</Name>
    <Weight>0.5</Weight>
    <PriceType>FutureSettlement</PriceType>
    <FutureMonthOffset>0</FutureMonthOffset>
    <DeliveryRollDays>0</DeliveryRollDays>
    <DeliveryRollCalendar>TARGET</DeliveryRollCalendar>
  </Underlying>
</CommodityPositionData>

Source: ORE User Guide, Products catalogue, commodityposition.tex, listing Commodity Position (optional elements omitted).