What is a Cash Adjustment and how does it work when trading Natural Gas?
It is a type of adjustment that can be debited or credited to your account balance when trading with leverage on the tokenised Natural Gas market.
Why was it introduced?
The price on the tokenised Natural Gas market is based on the two nearest natural gas futures (US Henry Hub). After the expiration date of one of the futures, the price automatically switches to the next future without any additional delistings or the need to close and reopen operations.
Since the prices of futures for different periods can differ significantly, and due to the specifics of price formation, technical changes in the token’s value may occur that are not related to the actual market movement. To prevent this factor from affecting the client’s financial result (i.e., a positive price change is balanced by a corresponding debit adjustment, and a loss is compensated by a proportionate credit), we previously applied a funding fee (positive or negative) in a proportional amount. However, this could make the funding fee significantly higher than bank interest rates.
Therefore, we decided to structure it so that the funding fee includes only the market bank interest, while the cash adjustment (price change adjustment) is debited or credited separately.
For reference, and with an acceptable margin of error, you can calculate the adjustment amount using the following formula:
(Y2−X2)∗(1−T1/T2)−(Y1−X1)∗(1−(T1+1)/T2), where:
- X1 and X2 – the price of the futures contract expiring in the current month at the end of the day two days before and the previous day, respectively;
Y1 and Y2 – the price of the futures contract expiring in the next month at the end of the day two days before and the previous day, respectively;
T1 – the number of days until the expiration of the current month’s futures contract;
T2 – the number of days from the expiration date of the previous futures contract to the expiration date of the current month’s futures contract.
After that, you will need to calculate the adjustment amount taking into account the number of Natural Gas tokens in your leveraged position.
The cash adjustment does not affect your profit or loss — its purpose is to accurately reflect the transition between contracts, just like a dividend payment affects the index price.