Spot Market Price Discovery
At the most basic level, price discovery is where supply meets demand. In thin and opaque markets, finding that exact crossing point is a tall task, particularly when the commodity is not actually commoditized. Different quality specifications, origins of product and destination of delivery, and many other factors all affect where supply meets demand. A centralized marketplace allowing buyers and sellers to congregate is the hallmark of price discovery and transparency. But even in some marketplaces, commodity products with drastic differences in quality and other specifications, discovering an exact price of a product can be difficult.
Using our commodity market expertise, PanXchange creates index and benchmark prices adhering to IOSCO principles for Financial Benchmarks, utilizing inputs from our trading system as well as confirmed and recorded pricing reports. Stakeholders in the respective commodity markets use these index prices in negotiations, term contract settling, and financial modeling.
Index Pricing For Spot Negotiations
Effectively negotiating prices — including term, spot, and forward — reduces supply chain costs and boosts top and bottom lines. But without a marketplace, knowing exactly where prices are to start negotiations requires calling all counterparts to assess conditions. Often times in hot markets, unscrupulous brokers come out of the woodworks.
Utilizing index prices gives market participants strong quantitative data on where to begin negotiations. Using price indices in a supply chain management toolkit gives you the ability to increase top and bottom lines.
Indices And Benchmarks To Price Term Contracts
While fixed price term contracts may seem the most secure, they are often the most risky from a financial perspective. If prices spike significantly, the seller will want out of the contract by any means necessary. The chance that a party will default on a fixed price term contract in a highly volatile industry is significant. But term contracts can be valuable to ensure smooth operations by continual flow of product. Almost all commodity markets have at least some product locked in term contracts.
Market stakeholders use PanXchange indices to price and settle term contracts. Using PanXchange indices as the basis for pricing ensures buyers and sellers are up to date with current market values, allowing these firms to focus energies on operational efficiencies that differentiates them from competitors.
Index Pricing to Settle Derivative Contracts
Derivative contracts allow financial speculators to enter the market with the risk of having to manage physical delivery. While speculators often get a bad rep, they provide liquidity and narrow the bid-ask spread, benefiting stakeholders along the entire supply chain.
But derivative products must have some mechanism to tie the contract to the physical market. The traditional method is having a physical delivery method for the futures. But this is often costly and not the core competency of financial exchanges and clearinghouses. Settling futures contracts against an index or benchmark price alleviates a significant amount of the burden from the exchange listing and the firm clearing the contract. Please contact PanXchange staff for further details on creating and listing index settled futures contracts.