Question

Under what scenario would a trader be more likely to misreport a higher local transaction price to the price reporting agency such as Platts?

a. the trader has a short position in a basis swap and would benefit from local price index decreasing
b. the trader has a long position in a basis swap and would benefit from local price index decreasing
c. the trader has a short position in a basis swap and would benefit from local price index increasing
d. the trader has a long position in a basis swap and would benefit from local price index increasing

Answer 1

A trader with a short position in a basis swap would benefit from reporting a higher local price to a price reporting agency, as it would make their short position more profitable when the index adjusts to reflect the true market value.

Step-by-step explanation:

Under a scenario where a trader would stand to benefit from an increase in the local price index, they might be incentivized to misreport a higher local transaction price to a price reporting agency like Platts. Specifically, if the trader has a short position in a basis swap, this means they are betting that the differential between the local price index and the reference price index will widen. If they report a higher local price, the differential appears smaller, and their short position becomes more profitable when the index corrects to the true market value.