The cost of the hedge3 May 2022 10:29
"Once the loan is clear, what would be the penalty costs to break the hedge as a rule of thumb. Thanks."
Asked on 2 May 2022
"There are not necessarily any significant penalty costs involved however the commercial cost is the difference between the forward curve prices for the period from the date at which the hedge is broken to the date of the scheduled maturity of the hedge versus the fixed hedge contract prices over that same period.
Thus the cost can only be known at the time the hedge counterparties determine to break or “counter hedge” it. In effect we would be taking out a new hedge for the residual period and amount but in the opposite direction – i.e. currently we are promising to supply Y therms for X pence/therm and to break the hedge we would be promising to buy Y therms for Z pence/therm. Z being the new forward curve prices and X being the original hedge contract prices.
In practice it would only make sense if we were interested in engaging in dynamic hedging – i.e. we felt we could do better trading in and out of positions over short contract months than the market. Generally speaking this is best described as gambling unless you have a large book of varied supply and distribution obligations and wish to balance it out in aggregate. At present we do not."
Yes, that's the way hedge contracts work.
ANGS has again correctly reaffirmed that the cost of "breaking the hedge" would be calculated at mark to market rates, i.e. at whatever the per month differential is between the hedged price on all remaining swap contracts versus the futures price on all remaining swap contracts at the time.
Right now and taking into account the latest gas prices, that's just over £68.5 million pounds. Which is (of course) exactly the sum that Mercuria is due over the 3 year hedge, utterly regardless of how much or how little gas is produced.
Sign In
Follow the stocks
