Change in Margin Model for Freight Option Contracts

LCH.Clearnet Ltd would like to advise its EnClear Members that it will be changing the current Black 76 model used for valuation of freight options to include the Turnbull-Wakeman Adjustment.

EnClear Freight Options are all European style, and automatically exercise into the underlying freight future contract if in the money at expiry. The final settlement price for the underlying freight futures is the average of Baltic spot price assessments for every day in the expiry month. These options can therefore be thought of as Asian style options on the spot price.

Turnbull-Wakeman makes two adjustments to inputs of the Black 76 model:

• Adjusts the index volatility to account for the fact that the option settles on an average of spot price assessments.
• During the averaging period of the option, it also adjusts the future price and strike price to take into account the spot price assessments which are already known.

The changes will take effect on Monday 21 September 2015. The impact will mainly be observed on options which are close to expiry.

If you have any questions, please do not hesitate to contact Isabella.kurek-smith@lchclearnet.com