Fact Pattern Sample Clauses

Fact Pattern. A Sovereign induces a farmer to sell his anticipated production of 100,000 bushels of corn forward to User A at a fixed price for delivery during the expected harvest. In return for the farmer entering into the fixed-price forward sale, the Sov- ereign agrees to pay the farmer the dif- ▇▇▇▇▇▇▇ between the market price at the time of harvest and the price of the fixed- price forward, in the event that the market price is above the price of the forward. The fixed-price forward sale of 100,000 bushels of corn reduces the ▇▇▇▇▇▇’▇ downside price risk associated with his anticipated agricultural production. The Sovereign faces commodity price risk as it stands ready to pay the farm- er the difference between the market price and the price of the fixed-price contract. To reduce that risk, the Sovereign purchases 100,000 bushels of Chicago Board of Trade (‘‘CBOT’’) Corn Referenced Contract call op- tions. Analysis: Because the Sovereign and the farmer are acting together pursuant to an express agreement, the aggregation provi- sions of § 151.7 and § 151.5(b) apply and they are treated as a single person. Taking the po- sitions of the Sovereign and farmer jointly, the risk profile of the combination of the for- ▇▇▇▇ sale and the long call is approximately equivalent to the risk profile of a synthetic long put.521 A synthetic long put may be a bona fide hedge for anticipated production. Thus, that single person satisfies the general requirements for bona fide hedging trans- actions (§ 151.5(a)(1)(i)–(iii)) and specific re- quirements for anticipated agricultural pro- duction (§ 151.5(a)(2)(i)(B)). The synthetic long put is a substitute for transactions that the farmer will make at a later time in the physical marketing channel after the crop is harvested. The synthetic long put reduces the price risk associated with anticipated ag- ricultural production. The size of the hedge is equivalent to the size of the Sovereign’s 521 Put-call parity describes the mathe- matical relationship between price of a put and call with identical strike prices and expiry. risk exposure. As provided under § 151.5(a)(2)(i)(B), the Sovereign’s risk-reduc- ing position will not qualify as a bona fide hedge in a physical-delivery Referenced Con- tract during the last five trading days.

Fact Pattern. Elevator A, a grain mer- chandiser, owns a 31 million bushel storage facility. The facility currently has 1 million bushels of corn in storage. Based upon its historical purchasing and selling patterns for the last three years, Elevator A expects that in September it will enter into fixed-price forward purchase contracts for 30 million bushels of corn that it expects to sell in De- cember. Currently the December corn fu- tures price is substantially higher than the September corn futures price. In order to re- duce the risk that its unfilled storage capac- ity will not be utilized over this period and in turn reduce Elevator A’s profitability, El- evator A purchases the quantity equivalent of 30 million bushels of September CBOT Corn Referenced Contracts and sells 30 mil- lion bushels of December CBOT Corn Ref- erenced Contracts. (1) The December CBOT Corn futures price is substantially above the September CBOT Corn futures price; and (2) Elevator A reasonably expects to engage in the anticipated merchandising activity based on a review of its historical purchasing and selling patterns at that time of the year. The risk arises from a change in the value of an asset that the firm owns. As

Fact Pattern. Company A owns 100 per- cent of Company B. Company B buys and sells a variety of agricultural products, such as wheat and cotton. Company B currently owns 1 million bushels of wheat. To reduce some of its price risk, Company B decides to sell the quantity equivalent of 600,000 ▇▇▇▇- ▇▇▇ of CBOT Wheat Referenced Contracts. After communicating with Company B, Com- pany A decides to sell the quantity equiva- lent of 400,000 bushels of CBOT Wheat Ref- erenced Contracts. § 151.5(a). The sale of wheat Referenced Con- tracts by Company A and B meets the gen- eral requirements for bona fide hedging transactions (§§ 151.5(a)(1)(i)–(iii)) and the specific provisions for owning a cash com- modity (§ 151.5(a)(2)(i)). The transactions in Referenced Contracts by Company A and B represent a substitute for transactions to be taken at a later time in the physical mar- keting channel. The transactions in Ref- erenced Contracts by Company A and B are economically appropriate to the reduction of risk because the combined total of 1,000,000 bushels of CBOT Wheat Referenced Contracts sold by Company A and Company B does not exceed the 1,000,000 bushels of wheat that is owned by Company A. The risk exposure for Company A and B results from a potential change in the value of wheat.

Fact Pattern. In order to develop an oil field, Company A approaches Bank B for fi- nancing. To facilitate the loan, Bank B first establishes an independent legal entity com- monly known as a special purpose vehicle (SPV). Bank B then provides a loan to the SPV. Payments of principal and interest from the SPV to the Bank are based on a fixed price for crude oil. The SPV in turn makes a production loan to Company A. The terms of the production loan require Com- pany A to provide the SPV with volumetric production payments (VPPs) based on the SPV’s share of the production and the pre- vailing price of crude oil. Because the price of crude may fall, the SPV reduces that risk by entering into a NYMEX Light Sweet Crude Oil crude oil swap with Swap Dealer C. The swap requires the SPV to pay Swap Dealer C the floating price of crude oil and for Swap Dealer C to pay a fixed price. The notional quantity for the swap is equal to the expected production underlying the VPPs to the SPV.

Fact Pattern. Company A enters into a risk service agreement to drill an oil well with Company B. The risk service agreement provides that a portion of the revenue re- ceipts to Company A depends on the value of the oil produced. Company A is concerned that the price of oil may fall resulting in lower anticipated revenues from the risk service agreement. To reduce that risk, Com- pany A sells 5,000 NYMEX Light Sweet Crude Oil Referenced Contracts, which is equiva- lent to the firm’s anticipated share of the oil produced. (a) (1)(i)–(iii)) and the specific provisions for services (§ 151.5(a)(2)(vii)).

Fact Pattern. When Elevator A purchased 500,000 bushels of wheat in April it decided to reduce its price risk by selling the quantity equivalent of 500,000 bushels of CBOT Wheat Referenced Contracts. Because the price of wheat has steadily risen since April, Eleva- tor A has had to make substantial mainte- ▇▇▇▇▇ margin payments. To alleviate its concern about further margin payments, Ele- vator A decides to enter into a repurchase agreement with Bank B. The repurchase agreement involves two separate contracts: A fixed-price sale from Elevator A to Bank B at today’s spot price; and an open-priced pur- chase agreement that will allow Elevator A to repurchase the wheat from Bank B at the prevailing spot price three months from now. Because Bank B obtains title to the wheat under the fixed-price purchase agreement, it is exposed to price risk should the price of wheat drop. It therefore decides to sell the quantity equivalent of 500,000 bushels of CBOT Wheat Referenced Contracts.

Fact Pattern. Soybean Processor A has a total throughput capacity of 100 million tons of soybeans per year. Soybean Processor A ‘‘crushes’’ soybeans into products (soybean oil and meal). It currently has 20 million tons of soybeans in storage and has offset that risk through fixed-price forward sales of the amount of products expected to be pro- duced from crushing 20 million tons of soy- beans, thus locking in the crushing margin on 20 million tons of soybeans. Because it has consistently operated its plant at full ca- pacity over the last three years, it ▇▇▇▇▇▇- ▇▇▇▇▇ purchasing another 80 million tons of soybeans over the next year. It has not sold the crushed products forward. Processor A faces the risk that the difference in price be- tween soybeans and the crushed products could change such that crush products (i.e., the crush spread) will be insufficient to cover its operating margins. To lock in the crush spread, Processor A purchases 80 million tons of CBOT Soybean Referenced Contracts and sells CBOT Soybean Meal and Soybean Oil Referenced Contracts, such that the total notional quantity of soybean meal and oil Referenced Contracts equals the expected production from crushing soybeans into soy- bean meal and oil respectively. trading days provided it is not in a physical- delivery Referenced Contract. Given that Soybean Processor A has pur- chased 80 million tons worth of CBOT Soy- bean Referenced Contracts, it can reduce its processing risk by selling soybean meal and oil Referenced Contracts equivalent to the expected production. The sale of CBOT Soy- bean, Soybean Meal, and Soybean Oil con- tracts represents a substitute for trans- actions to be taken at a later time in the physical marketing channel by the soybean processor. Because the amount of soybean meal and oil Referenced Contracts sold for- ▇▇▇▇ by the soybean processor corresponds to expected production from 80 million tons of soybeans, the hedging transactions are economically appropriate to the reduction of risk in the conduct and management of the commercial enterprise. These transactions arise from a potential change in the value of soybean meal and oil that is expected to be produced. The size of the permissible hedge position in the products must be reduced by any fixed-price sales because they are no longer unsold production. As provided under § 151.5(a)(2)(i)(B), the risk reducing position does not qualify as a bona fide hedge in a physical-delivery Referenced Contract dur- ing the last five...

Fact Pattern. A City contracts with Firm A to provide waste management services. The contract requires that the trucks used to transport the solid waste use natural gas as a power source. According to the contract, the City will pay for the cost of the natural gas used to transport the solid waste by Firm A. In the event that natural gas prices rise, the City’s waste transport expenses rise. To mitigate this risk, the City estab- lishes a long position in NYMEX Natural Gas Referenced Contracts that is equivalent to the expected use of natural gas over the life of the service contract.

Fact Pattern. Natural Gas Producer A in- duces Pipeline Operator B to build a pipeline between Producer A’s natural gas ▇▇▇▇▇ and the ▇▇▇▇▇ Hub pipeline interconnection by entering into a fixed-price contract for nat- ural gas transportation that guarantees a specified quantity of gas to be transported over the pipeline. With the construction of the new pipeline, Producer A plans to deliver natural gas to ▇▇▇▇▇ ▇▇▇ at a price differen- tial between his gas ▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇ that is higher than its transportation cost. Producer A is concerned, however, that the price differential may decline. To lock in the price differential, Producer A decides to sell outright NYMEX ▇▇▇▇▇ ▇▇▇ Natural Gas Referenced Contract cash-settled futures contracts and buy an outright swap that NYMEX ▇▇▇▇▇ ▇▇▇ Natural Gas at his gas ▇▇▇▇▇. Analysis: This transaction satisfies the general requirements for a bona fide hedge exemption (§§ 151.5(a)(1)(i)–(iii)) and specific provisions for services (§ 151.5(a)(2)(vii)).522 The hedge represents a substitute for trans- actions to be taken in the future (e.g., selling natural gas at ▇▇▇▇▇ Hub). The hedge is eco- nomically appropriate to the reduction of risk that the location differential will ▇▇- ▇▇▇▇▇, provided the hedge is not larger than the quantity equivalent of the cash market commodity to be produced and transported. As provided under § 151.5(a)(2)(vii), the risk reducing position will not qualify as a bona fide hedge during the spot month of the physical-delivery Referenced Contract. 522 Note that in addition to the use of Ref- erenced Contracts, Producer A could have hedged this risk by using a basis contract, which is excluded from the definition of Ref- erenced Contracts.