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Merchant Trade Capital: Unlimited, Costless Capital?

Merchant Trade Capital: Unlimited, Costless Capital?. How much does it take? Identifying Capital Components What’s the cost? Pricing Trade Capital Components Will market bear the cost? Structural Mitigants (Capital Management).

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Merchant Trade Capital: Unlimited, Costless Capital?

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  1. Merchant Trade Capital: Unlimited, Costless Capital? • How much does it take? Identifying Capital Components • What’s the cost? Pricing Trade Capital Components • Will market bear the cost? Structural Mitigants (Capital Management)

  2. How Much (Capital) Does it Take?Identifying Capital Components • “Lending” (Deploying) Capital • Credit Assets • Sales Payment cycle (net/25) • PRMAs (MTM Assets): Probabilistic Capital Deployed • “Borrowing” (Sourcing) Capital • Credit Liabilities • Purchases: (same payment cycle) • PRMLs (MTM Liabilities): Probabilistic Capital Sourced • Why/how is this a bad thing?

  3. [A/R slide]

  4. [MTM +/- slides]

  5. What’s the Cost?Pricing Trade Capital • ‘Lending’ Commodity / Position (Credit Assets) • Market Price of Credit (Credit Spreads and Default Probability) • Portfolio Diversification • Term Structure Sensitivity (credit theta) • Subordination (contractual and structural) • ‘Borrowing’ Commodity / Position (Credit Liabilities) • Uncommitted Capital / Incomplete Capital • BalanceSheet Liquidity Stress/Tax • Missing Piece: Contingent Capital (Backstop) • Cost of Contingent Capital?

  6. [CS term slide]

  7. “Fully-loaded” Capital Cost: Example #1A/Rs & A/Ps • Example: Purchase at GasDaily; 10,000 MMBtu/d; and Sale at GasDaily; 10,000 MMBtu/d • How Much Capital? • Lend Capital (Sale): A/R Credit Risk Assumed • Borrow Capital (Purchase): A/P BalanceSheet Liquidity Consumption • Cost of Capital? • Counterparty Default Risk • BalanceSheet Stress • Incremental increase in committed capital revolver

  8. “Fully-loaded” Capital Cost: Example #2PRMAs & PRMLs • Example: BUY: 1-Year Fixed-Price Swap; 10,000 MMBtu/d SELL: 1-Year Fixed-Price Swap; 10,000 MMBtu/d • Capital Identified • Capital Deployed (Sale): Potential MTM Credit Risk Assumed • Capital Sourced (Purchase): Potential MTM Liability/Liquidity Assumed • Cost of Capital • Counterparty Default Risk • Credit Spreads (or Default Probability and Recovery) • Term Structure: One-Year; delcining volume • BalanceSheet Stress • Incremental increase in committed capital revolver?

  9. Will Market Bear the Cost?Structural Mitigants & Capital Management • Position Consolidation • Consolidation Factor (gross vs. net throughput ) • Cleared Products • Capital Management Opportunity • Market Structure • Price Discrimination despite Counterparty Anonymity? • Example: best available price (price stack ‘depth’) • Credit risk premium embedded? • Capital Advantages?

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