Reference no: EM133487313

Case: Your company, ABC Trading Ltd (ABC), has an 80kt cargo of diesel 10ppm arriving in ARA in 7 days time. Currently the cargo remains unsold and it is your task to decide what ABC should do to maximise the profit or minimise the loss on disposal of the cargo. You have succeeded in pricing the physical cargo at a value of $592/MT inclusive of freight and other costs. The cargo is currently hedged with 800 lots of the first month (M1) ICE Gasoil 10ppm contract. The material fully meets the ICE Gasoil 10ppm contract specifications. M1 ICE Gasoil expires in 14 days.

ABC has a bid from Viboil (a local barge trading company) for the cargo at ICE Gasoil 10ppm M1 minus $1.50/MT CIF Rotterdam.

ABS has an option from Tankstor to procure 100,000 cubic meters (m3) of Gasoil storage in Rotterdam for a period of either 30 days or 60 days at a cost of $5.00 per m3 for each 30-day period. The storage fee includes the cost of using the jetty facilities for discharge and loading FOB to ship or barge if required.

ABC must now decide whether to take the storage, and if so which period would be most profitable?

Additional Information
• Bill of Lading (BL) quantity - 80,000 MT (Metric Tonnes).
• Density - 0.845 kg/litre at 15 Celsius.
• Sulphur - 10ppm max.
• ICE Gasoil 10ppm Delivery Procedure: Contracts are for the future delivery of low sulphur gasoil from the seller to the buyer into barge (or coaster up to 10,000 dwt) or by in-tank or inter-tank transfer from an Exchange Recognised Customs and Excise bonded storage installation or refinery in the Amsterdam, Rotterdam, Antwerp (ARA) area (including Flushing and Ghent) nominated by the seller and on a day nominated by the buyer within a mutually agreed 5 day delivery range between the 16th and the last calendar day of the delivery month. Quantity and quality are verified by one Exchange approved inspector selected from two nominated by the buyer. Buyers and sellers adhere to strict deadlines set out in the Exchange Contract Rules and Procedures.

• Assume there are no outturn losses, i.e., Outturn quantity = BL quantity
• Assume financing is at 0% per annum
• Current ICE Gasoil 10ppm market prices:
o Physical Gasoil 10ppm Barges: $595.25/MT
o M1: $595.25/MT
o M2: $602.00/MT M3
o M3: $607.00/MT

Question 1. Does ABS's storage option provide sufficient capacity to store ABC's physical cargo? Explain your reasoning with appropriate calculations.

Question 2. Comparing the physical cargo offer from Viboil, the Tankstor offer and using the ICE Gasoil market prices describe how you would evaluate the following options for ABC - calculating the profit or loss in each case. Finally, recommend which option you would take and any hedging actions you would need to take.

a. Sell to barge trader (Viboil) on arrival

b. Take storage and store for 30 days and adjust ICE Futures Position, as appropriate, for a sale at the end of the storage period.

c. Take storage and store for 60 days and adjust ICE Futures Position, as appropriate, for a sale at the end of the storage period.
Your recommendation is?