Explanation of Contracts: Accumulator
Jun 02, 2023
By Lindy McMillen, Grain Originator - Dighton Area
Your Garden City Co-op Grain Team has the ability to customize a variety of over-the-counter (OTC) products to fit your operation’s grain marketing needs. One of the contracts that we offer is an accumulator. While there are a variety of ways that this product can be built and customized, we typically build them with a guaranteed quantity and Euro Double-Up. Accumulators allow the farmer to price bushels above the current market in exchange for an offer of additional bushels if the market is above the accumulation level at expiration. Here’s an example of how that could work.
At the time that the pictured quote was pulled, December 2023 corn futures were trading at $5.3125. That level is the Guaranteed Level on the contract. The Accumulation Level on this contract is $5.5625 and the Knock-Out Level is $4.5600.
Every week the contract settles above the Knock-Out Level ($4.5600), 100% of the weekly notional quantity is priced at the accumulation Level ($5.5625).
If the Knock-Out Level ($4.5600) trades or is breached to the downside, further accumulations and the Double-Up risk cease. Any swaps already accumulated will continue to exist. Remaining accumulations are priced at the Guaranteed Level ($5.3125).
At expiration, if the contract settles above the Accumulation Level ($5.5625) and a knock-out has not occurred, an additional 100% of the notional quantity is priced at the Accumulation Level.
These types of contracts are often considered in a sideways or bearish market. The “best case” scenario is that the market stays between the Knock-Out Level ($4.5600) and the Accumulation Level ($5.5625) and the farmer receives one contract for the original bushel amount at the Accumulation Level ($5.5625).
As with all specialty contracts, there are risks and rewards associated with Accumulators. If you have additional questions about how this contract works or if it could fit into your grain marketing portfolio, reach out to the grain team.
*Note: The levels used in this example are for educational purposes only and are not tradeable. Ask your local grain team member for an up-to-date quote.
Your Garden City Co-op Grain Team has the ability to customize a variety of over-the-counter (OTC) products to fit your operation’s grain marketing needs. One of the contracts that we offer is an accumulator. While there are a variety of ways that this product can be built and customized, we typically build them with a guaranteed quantity and Euro Double-Up. Accumulators allow the farmer to price bushels above the current market in exchange for an offer of additional bushels if the market is above the accumulation level at expiration. Here’s an example of how that could work.
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At the time that the pictured quote was pulled, December 2023 corn futures were trading at $5.3125. That level is the Guaranteed Level on the contract. The Accumulation Level on this contract is $5.5625 and the Knock-Out Level is $4.5600.
Every week the contract settles above the Knock-Out Level ($4.5600), 100% of the weekly notional quantity is priced at the accumulation Level ($5.5625).
If the Knock-Out Level ($4.5600) trades or is breached to the downside, further accumulations and the Double-Up risk cease. Any swaps already accumulated will continue to exist. Remaining accumulations are priced at the Guaranteed Level ($5.3125).
At expiration, if the contract settles above the Accumulation Level ($5.5625) and a knock-out has not occurred, an additional 100% of the notional quantity is priced at the Accumulation Level.
These types of contracts are often considered in a sideways or bearish market. The “best case” scenario is that the market stays between the Knock-Out Level ($4.5600) and the Accumulation Level ($5.5625) and the farmer receives one contract for the original bushel amount at the Accumulation Level ($5.5625).
As with all specialty contracts, there are risks and rewards associated with Accumulators. If you have additional questions about how this contract works or if it could fit into your grain marketing portfolio, reach out to the grain team.
*Note: The levels used in this example are for educational purposes only and are not tradeable. Ask your local grain team member for an up-to-date quote.