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The unused quantity feature is meant to deal with small deviations in actual logistic deliveries. This should not be used for contractual changes. Example:
| • | You priced 1000 mt of sugar with 20 lots, with a futures market of 309 and premium if 50. |
| ▪ | So the agreed price is 350 USD/MT. |
| • | You then do the actual delivery for 999 MT or for 1001 MT. |
| ▪ | Typically you will not deliver 1 MT less, nor will you do additional pricing for the 1 MT extra. You simply apply the agreed price to the actual quantity. |
| • | Now we look at the Mark to Market before it is realized. You will see this makes the hedge imperfect: |
| ▪ | You sold 999 or 1001 MT at a market level of 300 USD/MT and we hedged 1000 MT at that level. |
| • | Then the market goes by 40 USD/MT |
| ▪ | Then you will loose or win 40 USD. |
| • | When you delivered 1001 you adjust Mark to Market to this by reflecting the real quantity. |
| • | But when you deliver 999, the Mark to Market will not reflect this as the 1 MT will still be there as open quantity. Until it is decided that the 1 MT is not remaining open quantity to be delivered later and that this 1 MT will not be used, then the Mark to Market reveals that in the end the hedge is not perfect. |
The same rules are also applied in case you did not yet price the 1000 mt: you agreed to price 1000, and the unused quantity of 1 MT does not affect that agreement.
Of course in theory it is possible to have an unused quantity of 50 MT, representing 1 full lot.
In case you priced in advance, this means you have a bigger risk, in our example 50x40=2000 USD, for the over/under delivery.
In case you price later, you may choose to eliminate this risk by adjusting the contract quantity, from e.g. 1000 to 950 or 1050. In this case you can hedge it with 19 or 21 lots. Making 50 MT unused would not be the right instrument for this as it is really more than just a logistic deviation.
Summarizing:
| • | Pricing follows the contractual agreement. |
| • | Unused quantity is meant to manage small deviations within contractual agreement. It does not affect pricing, but the real quantities do become visible in Mark to Market and Position to reflect the actual risk coming from imperfect hedges (many imperfect hedges in the same direction may add up to substantial amounts requiring to sell/buy an extra lot). |
| • | In case deviations are such that pricing is really affected, you agree(!) to price more or less lots. Then you need to adjust the contractual agreement. This will reestablish balance also in the Mark to Market. |
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