Price exposure is not what you own. It is the gap between what you have priced on each side, it changes on pricing days whether or not anyone trades, and the days that change it are often chosen by a ship or a counterparty rather than by you.
Most physical trading businesses keep two positions and report one. The first counts goods: what you will receive and what you will deliver. The second counts prices: how much of what you bought and sold already has an agreed number, and how much is still waiting for one. Price exposure lives entirely in the second. On any trade whose price is set by a formula rather than agreed on the day, the two positions differ, and a book can be physically flat while long on price, or full of inventory while carrying very little flat-price exposure.
This article sets out how a price position is actually built: why it is the gap between what is priced on each side rather than what you hold, why it changes on pricing days whether or not anyone trades, why the days that change it are often chosen by a ship or a counterparty rather than by you, and what a report of it has to carry before anyone can hedge against it. It is written for the people who maintain that number and answer for it: the middle office who keep the priced and unpriced quantities, the traders whose hedges depend on them, and the risk function who report them upward.
If the distinction is new to you, start with Every physical trade puts you in two positions, and only one of them is about price. If you already run a priced and unpriced report and want the part that goes wrong quietly, start with The count changes on pricing days, whether or not anyone trades.
Every physical trade puts you in two positions, and only one of them is about price
The physical position answers "what will we receive and deliver". The price position answers "for how much of that have we agreed a number". The two coincide only when every price is fixed on the day it is agreed, and in physical commodities that often does not happen.
A great deal of physical trade is priced by formula: an average of published quotations over a set of dates, plus or minus an agreed differential. The quantity is committed when the trade is agreed. The price is not. It arrives later, a day at a time, as the dates in the formula pass. Until then the purchase or sale is a firm obligation to move goods at a price that does not yet exist.
That single fact is enough to separate the two positions, and the simplest way to see it is to hold the goods constant and change only how they are priced.
Buy a cargo at a fixed price and sell it on a formula that prices next month. Physically you are matched: everything bought is sold. On price you are long the whole cargo, because you have paid a known number and will receive an unknown one. Every move in the market between now and the end of the sale's pricing period is yours.
Now buy the same cargo on a formula and sell it on the same formula, priced over the same dates. Physically you may hold it in a tank for weeks. On flat price you are close to flat, because whatever the market does to the purchase price it does to the sale price too. What you still carry is the difference between the two differentials and anything that makes the two windows diverge, which is a different and usually smaller exposure.
Price exposure is created by the mismatch between how you buy and how you sell, not by what you hold. A position report that starts from the goods will be accurate about the goods and silent about the thing that moves the profit and loss.
Price exposure is the gap between what you have priced on each side
A price position is the quantity you have bought at a known price, less the quantity you have sold at a known price, adjusted for hedges. Quantity that is still unpriced on both sides cancels; quantity that is priced on one side only does not.
Stated that way it is arithmetic, and the arithmetic is not where the difficulty sits. The difficulty is that "priced" is not a property of a trade. It is a property of a portion of a trade, and the portion changes over time.
A fixed-price trade is fully priced from the moment it is agreed. A formula-priced trade starts fully unpriced and becomes priced in slices, one for each quotation in its window, until the last one is published. Between those two moments it is partly priced, and the priced part is a fact that has to be computed from the formula, the window and the quotations published so far. It is not stored anywhere by default.
Two consequences follow that are easy to state and easy to get wrong.
Inventory is price exposure only to the extent that its purchase price is fixed and its sale price is not. Goods in a tank bought on a fixed price and not yet sold, or sold on a formula that has not priced, are a long price position. Goods bought on a formula and sold on a matching formula are not, however much of them there is. Valuing inventory and measuring price exposure are therefore different calculations, and a report that uses one as a stand-in for the other will be wrong in whichever direction the pricing terms happen to point.
The hedge has to be sized against the priced gap, not against the cargo. A futures position taken against a fixed-price purchase hedges the purchase. A futures position taken against a cargo that is unpriced on both sides has nothing to offset, and is itself the only flat-price exposure on that cargo.
The count changes on pricing days, whether or not anyone trades
A formula-priced trade converts from unpriced to priced one quotation at a time. On each pricing day the price position moves, with no trade, no booking and no decision behind it.
Take a sale priced on the average of a month's quotations. On the first day of the month none of it is priced. On each publication day thereafter another slice is fixed at that day's quotation, and on the last day the whole of it is. If the matching purchase was at a fixed price, the long price position that existed at the start of the month shrinks a slice at a time and is gone at the end. Nobody traded. The exposure changed every day.
This is the reason a hedge against a formula-priced trade cannot simply be put on and taken off. It has to be reduced in step with the pricing, so that as each slice of the physical leg fixes, the matching slice of the hedge is removed. A hedge lifted all at once at the start of the window leaves the remaining unpriced days unhedged. A hedge left in place until the end keeps protecting days that have already priced, where it no longer offsets anything and has become a position of its own. Either way the exposure is real, and it is created by the timing rather than by the size.
Where the window is anchored to an event, such as the date a cargo is loaded, there is a stage before any of this. Until the event has happened, the window's dates are an estimate drawn from the date the event is expected. When it happens, the dates are fixed. And if the window extends either side of the event date, part of it is already in the past by the time it is known: the days already published become priced in one step, on the day you learn which days they were. A report that was carrying those days as unpriced will show the price position jump overnight, and it will be right to.
A priced and unpriced report that holds only two states, priced and not, will be wrong for the whole of every window. Either it shows the trade as unpriced until the last quotation, overstating the exposure as it decays, or it shows it as priced from the first, understating it until it is gone. The useful state is a fraction, and the fraction is a function of the calendar.
The days that move the count are often chosen by a ship or a counterparty
Your price position changes when a pricing event happens, and many pricing events are decided outside your trading desk: by operations, by the counterparty, or by the publisher of the quotation.
Three kinds are ordinary in physical books.
Operational events that anchor a window. Where the formula prices around a loading or delivery date, the event that fixes the window happens at a terminal and is recorded first by whoever handles the vessel. The commercial consequence, that the price position has just moved, belongs to someone else, and reaches them when the operational record reaches them.
A late vessel is a repricing as well as a delay. For physical crude, that is worked through against a hedge dated to a contract month. Crude Oil Trading: Why the Barrel You Hedge Is Not the Barrel You Own
Elections by the counterparty. Some contracts let one party fix the price on a day of its choosing, within limits, by giving notice; in agricultural and metals markets this is a common way to trade. When the counterparty holds that right, your price position on that contract changes on the day they choose and by the amount they choose, and you find out when their notice is read. Until then the quantity is unpriced on your report and is in fact a decision waiting on somebody else.
The quotation itself. A window counts publication days, and publication follows the calendar of whoever publishes the quotation. A holiday in that calendar, a day with no assessment, or a correction to a published figure changes which slices price and at what number. The contract usually has a rule for each case; the report usually does not know the rule exists.
The rule for a missing quotation is written early and read late. Which party it hands the decision to is worked through clause by clause. Benchmark Pricing: Why the Benchmark Is a Rulebook, Not a Price
None of these is unusual and none of them is under the trading desk's control. What they have in common is that the fact which changes the price position is created somewhere other than the place where the price position is kept. The price position is only as current as the slowest route by which these facts reach it.
A price position without dates is a number nobody can hedge against
A single net figure tells you, at best, the size of the priced gap today. It does not tell you how that gap will open and close, and the hedge is built from when.
Consider a purchase priced on one month's average and a sale of the same quantity priced on the following month's. Summed up, the two legs cancel: equal quantities, opposite directions, both on formulas. A report that nets them shows nothing. Laid out by pricing date, the book is anything but flat. Through the first month the purchase prices and the sale does not, so the book grows steadily longer on price: what you pay is being fixed while what you receive is still open. Through the second month the sale prices and that long position runs back down to nothing. The netted figure was zero throughout; the exposure was zero only at the two ends.
This is why the unit a price position report has to carry is not a quantity but a quantity per pricing date. Accumulated up to today, it gives today's price position. Laid out forward, it gives the shape that a hedge has to match, and the shape is where the risk is. Two books with the same net price position can need entirely different hedges, and the net figure cannot tell them apart.
The trades are in the trading system, and the pricing schedule usually sits beside it
The trades that create price exposure are usually captured in a trading system. The calculation that turns them into a price position, day by day, is frequently maintained in a spreadsheet next to it.
That arrangement is not careless. The trading system holds the trades well. What it often does not hold, or holds less conveniently than a spreadsheet does, is the working state of each formula: which window applies, whether its anchoring event has happened, which quotations have been published and at what price, whether a counterparty has elected to fix, and which hedge slices have been removed against which pricing days. Those facts arrive from operations, from counterparties, from price publishers and from the desk, and a spreadsheet is the place where someone can bring them together quickly.
The consequence is the same one that appears wherever a calculation lives beside the system rather than in it. The price position is correct when the person maintaining the schedule has received every fact that changed it, and there is no signal when they have not. A missed loading date, an unread fixing notice or a holiday nobody entered produces a schedule that looks complete and is a day behind.
The same cargo bought and sold four ways carries four different exposures
| How it was bought | How it was sold | Physical position | Flat-price position | What you are actually exposed to | When that exposure ends |
|---|---|---|---|---|---|
| Fixed price | Fixed price | Matched | Flat | The margin is locked; what remains is whether both sides perform | When both sides have delivered and paid |
| Fixed price | Formula, not yet priced | Matched | Long the whole cargo | Every market move until the sale's window closes | As each slice of the sale's window prices |
| Formula, not yet priced | Fixed price | Matched | Short the whole cargo | Every market move until the purchase's window closes | As each slice of the purchase's window prices |
| Formula | Formula on the same quotations and dates | Matched | Close to flat | The two differentials, and any day the two windows stop coinciding | When both windows have priced |
Read down the third column: it says the same thing in every row. Read down the fourth: flat, long, short, close to flat. The column that decides what to hedge is the fourth one, and it is decided entirely by how each side was priced.
A price position line has to state six things before it can be hedged
| Field | Why it is load-bearing |
|---|---|
| The pricing basis of each side: fixed, or which formula | Decides whether the trade belongs in the price position at all |
| The quotation the formula uses, and who publishes it | Decides which publication calendar governs the pricing days |
| The window, as dates, and the event it is anchored to | Decides when the exposure decays; an anchored window moves when the event moves |
| How much has priced so far, and at what average | The fraction that turns an unpriced trade into a partly priced one |
| Any right to fix, who holds it, and whether it has been used | An unused right held by the counterparty is a change waiting on their decision |
| The hedge slices removed so far, against which pricing days | Shows whether the hedge has been reduced in step with the pricing, or ahead of it, or behind it |
A line carrying all six can be read by someone who was not there when the trade was agreed. A line without them can only be interpreted by whoever maintains the schedule.
Questions people ask about this
What is the difference between a physical position and a price position?
A physical position counts goods: how much you will receive and deliver, by product, place and period. A price position counts prices: how much of what you bought and sold already has an agreed number. They are the same only when every trade is priced on the day it is agreed. On formula-priced trades they diverge, and the price position is the one that tells you how your result will move when the market moves.
We are physically flat. Why does our profit and loss move with the market?
Because being physically flat means your purchases and sales match in quantity, not that they are priced at the same time. A fixed-price purchase sold on a formula that has not yet priced is physically matched and fully long on price. The same is true in reverse. The test is to set aside quantities and ask, for every open purchase and sale, how much has a known price today. The difference between the two sides is the exposure the market is acting on.
Is inventory always price exposure?
No. Inventory is price exposure to the extent that its purchase price is fixed and its sale price is not yet fixed. Goods bought and sold on matching formulas can sit in a tank for weeks while carrying very little flat-price risk, and goods bought on a fixed price carry the full exposure until a price for their sale is fixed, whether they are in a tank or still at sea. Valuing inventory and measuring price exposure are separate calculations.
How does our exposure change during a pricing period?
It changes with each published quotation in the window. On an averaging formula, each publication day fixes a slice of the quantity at that day's price, so a trade that was entirely unpriced at the start of the window is partly priced in the middle and fully priced at the end. Where the window is anchored to an event such as a loading date and extends either side of it, several days can price in one step on the day the event is known.
When should the hedge on a formula-priced cargo be removed?
In step with the pricing. As each slice of the physical trade fixes, the corresponding slice of the hedge has stopped protecting anything and should be removed. Lifting the whole hedge at the start of the window leaves the unpriced remainder exposed, and leaving it until the end turns the part against already-priced days into a position of its own. What makes this hard in practice is usually not the decision but knowing, on the day, how much has priced.
What happens to our exposure when a counterparty fixes the price?
It changes on the day they fix, by the quantity they fix, at the price of that day. Contracts that let one party choose when to fix are common in several markets, and when the right sits with the counterparty, the unpriced quantity on your report is a decision that belongs to them. The useful step is to list which open contracts carry such a right, who holds it, and how a fixing notice reaches the person who maintains the price position.
Can we manage priced and unpriced quantities in a spreadsheet?
Many companies do, and the calculation is not what fails. What fails is that each input arrives from a different place: loading dates from operations, fixing notices from counterparties, quotations and holiday calendars from publishers, hedge changes from the desk. The spreadsheet is right when every one of those has reached it. The threshold is not a number of trades; it is the point at which the person maintaining the schedule is no longer the first to hear about the events that change it.
Where should we start if we have never separated the two positions?
Take the open book and, for each purchase and sale, record two things: whether its price is fixed or set by a formula, and if a formula, which dates it prices on. Nothing else is needed for a first view. Laid out by pricing date, that list shows where the book is long and short on price and when each exposure ends, and it usually shows at least one place where the physical report and the price report disagree.
Where this lands in a trading system
Nothing above is an argument for buying software. It is an argument about which facts a price position is made of and where each of them first exists. Parts of it map onto system capabilities and parts of it do not.
The first conclusion is that physical trades and the hedges against them have to be held together before a price position can be computed at all. That is the job of a CTRM/ETRM system providing complete trading lifecycle management for commodity traders, integrating physical trade, financial hedging, risk control, and settlement in one platform; Time Dynamics' Fusion is one, and the parts of it that bear on this article are that complete physical trade lifecycle management and execution and advanced trading management for futures and derivatives markets sit in the same place, with comprehensive risk assessment and monitoring capabilities applied across both.
The second conclusion is that the facts which move a price position, the loading date that anchors a window, the notice in which a counterparty fixes, the quotation and the calendar it is published on, mostly arrive from outside the trading desk. That is a different problem, and it is the one X-Ray addresses: a non-invasive data processing and analysis platform, whose collection toolkit XDK performs non-invasive automated data collection from databases, Excel files, and web interfaces, and which is built to collect data without disrupting existing systems or workflows. The last property is the relevant one here, because the spreadsheet holding your pricing schedule is working, and a plan that starts by taking it away from the person who maintains it will not survive the first busy pricing month.
The third conclusion is that the same book has to be read several ways, by goods, by priced quantity, and by pricing date, and that the third view is the one most often rebuilt by hand. X-Sheet does one-click generation of personalized reports with Excel-like interface.
And here is where it stops. None of this decides whether to buy on a fixed price or a formula, and none of it decides how much exposure is worth carrying. It will not choose the day to fix when the right is yours, it will not make a counterparty send a fixing notice any sooner, and it does not publish a quotation or decide what a contract says should happen on a day with no assessment. What a system can settle is narrower and duller than the problem in this article: where each pricing fact is captured, how soon after it becomes true, and whether the person who needs today's price position can see it without asking the person who maintains the schedule. That is a real part of the gap. It is not the whole of it, and it is worth being clear about which part you are buying.
A note on the evidence in this article
This article contains no statistics, and that is deliberate. The observations behind it, which parts of the trade lifecycle still run on spreadsheets beside the trading system and where the facts that move a price position first appear, come from material we are not in a position to publish as a citable figure. A number nobody could check would make the argument look stronger and would make it worth less.
So the argument runs on mechanism, and each claim is written to be tested against your own book rather than taken on our authority. Three tests are proposed above and they are the intended use: lay out the open book by pricing date and compare it with the physical position, check whether your hedges have been reduced in step with pricing or all at once, and list which open contracts give a counterparty the right to fix. If your book answers those differently from what is written here, your book is the better evidence.
What you own is in the physical report. What you are exposed to is in the pricing schedule.