I have been watching these 3 pure play nitrogen fertilizer stocks…
All three had a very good run since the beginning of the year to until about Monday, 9 Jan 2012… gaining anywhere from 11-22% in 5 days… however, they have fallen sharply in the past couple days…
in my opinion, the up trend is likely to continue…
TNH – $166-170 entry point
UAN – I am inclined to wait for a little bit even though the recent drop has retraced the 50% fibonacci levels… I think good entry points in the $25 area..
RNF – this is a new issue and hasn’t traded long enough to deduce anything meaningful… although based on the recent run-up, I want to wait till it drops to the 50% fibonacci level around $18
I’m using SLV as a proxy for Silver… SLV is down huge on above average volume when the overall trading volume is fairly low…
· 50% Fibonacci retracement for the run from early 2009 to the May 2011 peak is around $25
· 25 is a nice round number to anchor psychologically
· next major support is also at 25
CFA Level 2 – Derivatives; Study Session 16, Reading 61 in 2011 curriculum/Reading 59 in 2010 – Futures Markets & Contracts
I will go over FRAs and Futures in this post. (FRA is part of previous reading)
Forward Rate Agreements (FRA)
FRA is yet another derivative product. The underlying in an FRA is an interest rate on a deposit or on a loan i.e. the price of an FRA is an interest rate. The deposit/loan can be for any period in the future and the beginning of this period can also be any period in the future. It is the beginning and ending of these periods that form the notation of an FRA.
For example, 2 x 5 FRA means that the derivative contract expires in 2 months and the underlying deposit or loan is initiated at the end of 2 months (from now) and ends at the end of 5 months (from now) i.e. the deposit/loan period is for 5 – 2 = 3 months and (it is worth repeating) those 3 months start 2 months from now. (confusing I know but it is imperative you get your head around this)
An FRA is a forward contract in which the long, agrees to pay a fixed interest payment at a future date and receive an interest payment at a rate to be determined at expiration of the contract (not the expiration of the deposit/loan).
Value of an FRA from CFA Institute:
The value of an FRA based on a Eurodollar deposit is the present value of $1 to be received at expiration minus the present value of $1 plus the FRA rate to be received at the maturity date of the Eurodollar deposit on which the FRA is based, with appropriate (days/360) adjustments.
The payment made at the expiration of the FRA is the difference between the Value of the FRA and the agreed upon price of the FRA, adjusted by the notional principal and the number of days.
The payoff is also discounted, however, to reflect the fact that the underlying rate on which the instrument is based assumes that payment will occur at a later date… remember that the period of deposit/loan starts at the expiration of the FRA contract and the interest payment on this deposit/loan is made at the end of the period.
Let’s move on to Futures Markets and begin by establishing the difference between Futures & Forwards
Pricing Futures is similar to Forwards, future price for an asset with no storage costs is given by:
The market price of a Forward contract is the amount a party to the transaction is willing to pay to terminate the contract. However, because futures are traded on an exchange and are settled and marked-to-market daily , the Futures contract have zero value at the end of the day and have non-zero value during the day.
Value of a futures contract = Current Futures price – Futures price at last mark-to-market
Because of the daily settlement feature of futures, cash is exchanged daily between the long and the short and this cash can be invested to earn a return. And because of this futures prices are sometimes higher than forwards for an identical contract.
The following table illustrates the difference:
Costs & Benefits of holding the underlying asset
If holding an underlying asset results in monetary costs and benefits (net cost), futures price is:.
If holding an underlying asset results in non-monetary benefits (convenience yield), futures price is:
All other formulas (dividend paying asset, coupon paying asset, etc) for pricing futures are similar to forwards.
In the next topic, I will discuss contango and backwardation.
Source of all formulas: Schweser Notes
What goes up vertically… comes down vertically (almost).
Disclosure: no position in silver or silver related securities
Yesterday, natural gas broke the downtrend line (top blue) of the symmetrical triangle. These triangles signal continuation of prior trend for about 75% of the time and are reversal signals otherwise.
Here is a 2-year daily price chart:
Will natural gas break out of its multi-year downtrend and surge forward or will it go to new lows? Here is a 5-yr weekly chart:
And just to throw a kink, here is a seasonal chart which suggests that the time to short natural gas is right around the corner.
Disclosure: short natural gas
There has been a lot of chatter about commodities blowing off lately (see this, this & this)… especially Copper (& Silver) which has risen dramatically since the 2009 lows. Copper is considered by many as a leading economic indicator…. without further adieu here is the technical picture for Copper
On the daily chart, copper recently broke out of the descending triangle and the short-term downtrend line… pink line. The medium term price channel (blue lines) is still intact and Copper could go higher and take out the Feb highs (fundamentals story don’t support this view)
The dotted line symmetrical triangle supports the continuation of prior (up)trend.
On the other hand, the weekly charts show a rising wedge pattern which is almost always a bearish sign… if confirmed using other indicators. In the case of Copper, MACD supports the rising trend and is not confirming the reversal… yet