Description
Describes about new products in commodities market viz. freight, electricity, carbon credit and weather.
Contemporary Issues & New Products.
Contemporary Issues
• • • • • • • • • • •
Can Indian exchanges be price setters Inflation and Commodity Exchanges Drivers of Operational Efficiency Exchanges to reform agri supply chains, warehouse developments APMCs acts amendments Taxation reforms Exchanges to infuse market inclusive economic growth Ban’s & Suspensions Domestic vs. International Exchanges Financial Lieracies initiatives FCRA Act
Commodities: New Entry?
Commodities
Freight
Electricity
Carbon Cr
Weather
INTANGIBLES
Freight
• A Freight derivative is a financial instrument for trading in future levels of freight rates, for dry bulk carriers and tankers
• These instruments are settled against various freight rate indices usually traded over the counter, but screenbased trading is gaining popularity
Freight Derivatives
• Freight derivatives are used by shipowners and operators, oil companies, trading companies and grain houses as tools for managing freight rate risk.
• Freight is a unique product, help organizations hedge cost of freight beforehand against possible price rise in future shipments
Some Facts
? The Baltic Exchange, with 550 members, already offers
offshore freight derivatives services to shippers
? Exchange provides daily freight market prices and a market for freight futures known as Forward Freight Agreements
? High cost of transporting dry commodities such as coal, grain and iron ore by sea has popularized Freight derivatives which help corporations to freeze their transportation costs
Freight Exchange in India • Baltic Exchange is a 250-year- old institution and the only established and self-regulated global market for shipbrokers, ship owners and charters
• Freight derivatives will make the industry competitive
CARBON CREDIT
Carbon Credit
• Carbon credits are a tradable commodity which help to reduce greenhouse gas emissions by giving them a monetary value
• A single credit gives the owner the right to emit one tonne of carbondioxide • International treaty, the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce
Market for CC
• • • Countries, in turn, set quotas on the emissions of businesses National CDM Authority Businesses that are over their quotas must buy carbon credits for their excess emissions
•
•
Businesses that are below their quotas can sell their remaining credits
Allowing credits to be bought and sold has created a futures market
•
Developed countries are bound by the Kyoto Protocol to cut greenhouse gas emissions between 2008 and 2012 by at least 5 per cent of the 1990 level
Market for CC
• Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price • There are exchanges which offer carbon credit contracts, the Chicago Climate Exchange the European Climate Exchange MCX in India
• The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control formalized in the Kyoto Protocal, international agreement between 169 countries • For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions • Managing emissions is one of the fastest-growing segments in financial services with a market worth about $30 billion, but which could grow to $1 trillion within a decade.
The Way it Works
3 Mechanisms have been set up
• Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
• JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost • Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project
The Way it Works
• Carbon credits are awarded to countries that are successful in reducing emissions of greenhouse gases • The main gases emitted by industries are methane, nitrous oxide, hydroflurocarbons, etc, which increase the atmosphere's ability to trap infrared energy • Under IET, countries can trade in the international carbon credit market. • Countries with surplus credits can sell them to countries with reduction commitments under the Kyoto Protocol.
Example of carbon credits
• Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to pollution
• Assume a factory XYZ produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have to say 80,000 tonnes
• XYZ either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
Example continued……….
• XYZ would buy the carbon credits on an open market from organizations that have been approved to sell legitimate carbon credits • Seller of a carbon credits might be a company that will have planted trees which draw a tonne of carbon dioxide from the atmosphere or have set up pollutant control systems • In effect XYZ might pollute a tonne, but is essentially now paying another group to go out and plant trees
Opportunities
• Since Carbon Credits are tradeable instruments with a transparent price, financial investors have started buying them for pure trading purposes • Private players earn Carbon Credits by carrying out environment friendly projects and sell them on the exchanges • Developing countries maintain that the major responsibility of curbing emission rests with the developed countries • Polluters Pay: Developed countries have polluted the most. (A cap on emissions would effectively mean a cap on a countries growth)
ELECTRICITY
Electricity
• • • •
Unique Aspects instantaneous delivery non-storability interactive delivery system extreme price volatility
Other Commodities in the Energy Sector • Oil • Coal • Natural gas (Launched 1990)
(Note: Underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand)
Globally
• Traded in futures market in the US, the UK, Australia, Sweden, Norway, Finland, Denmark, France and Germany. … and India
MCX has diversified a basket of energy products which includes :• crude oil, • furnace oil, • aviation turbine fuel • electricity • MCX platform accounts for 98 per cent of the entire energy related future market
Basics of Electricity Futures (US experience)
• Privatization of the electricity has led to Increased competition in bulk power and retail electricity markets • Greater price volatility as the industry moves away from administered cost-based rates and towards market-driven prices • Price volatility introduces new risks for generators, distributors and consumers • Electricity futures and other derivatives can help market participants manage, or hedge, price risks in a competitive electricity market
Electricity Futures
• The New York Mercantile Exchange (NYMEX) introduced electricity futures on March 29, 1996 • In a competitive electricity market, daily fluctuations in electricity prices will be the most dramatic manifestation of price volatility • Customers on real-time rates will face prices that may daily increase and decrease by more than 100% • Distribution companies buy power from generators in a spot market and sells power through fixed price contracts
Electricity Futures affects….
• Sudden rise in spot prices due to a supply shortage, would result in the distributor losing profits. This unacceptable risk would be mitigated by hedging • Similarly utilities and generating companies may find themselves in a position where they face competition from power generation from another fuel and will also resort to hedging
Meets Criteria
3 broad criteria for successful futures markets: • Prices are volatile • Diverse universe of buyers and sellers • Product is fungible. “Stored" in the form of: • Spare generating capacity • or Fuel inventories at power stations
Contract Specification
CBOT® ComEdK HUB ELECTRICITY FUTURES SALIENT FEATURES Trading Unit 1,680 megawatt hours (MWh) Price Basis U.S. dollars and cents per megawatt hour Tick Size $0.01 (1¢) per MWh ($16.80 per contract) Daily Price Limits The maximum permissible price fluctuation in any one day shall be $7 per MWh above or below the preceding day's settlement price for month succeeding the nearby trading
month.
Trading Hours Contract Months 8:00 a.m.-2:40 p.m., Chicago time Monthly: number of listed contracts
Contract Specification
Position Limits Reportable Position Last Trading Day Delivery Location Delivery Rate Delivery Times
Subject to determination by CBOT Board of Directors 25 contracts (in any one month) Trading will terminate on the fourth business day prior to the first calendar day of the delivery month Commonwealth Edison’s Control Area 5 MW Every on-peak hour (6:00:01 a.m. through 10:00:00 p.m., Chicago time) for all on-peak days of the delivery month
Delivered Power Amount depends on the number of on-peak days in the delivery month: 1,520 MWh for delivery months with 19 on-peak days 1,600 MWh for delivery months with 20 on-peak days 1,680 MWh for delivery months with 21 on-peak days 1,760 MWh for delivery months with 22 on-peak days 1,840 MWh for delivery months with 23 on-peak days Ticker Symbol BZ2
Weather Derivatives
• Financial instruments that can be used as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions • The underlying asset is rain/ temperature/snow/frost • Farmers can use weather derivatives to hedge against poor harvests caused by drought or frost • Theme Parks / sports events may want to insure against rainy weekends • Gas and power companies may use heating degree days (HDD) or cooling degree days(CDD) contracts to smooth earnings
Early Days
• the Chicago Mercantile Exchange introduced the first exchange-traded weather futures contracts in 1999 • The CME currently trades weather derivative contracts for 18 cities in the United States, nine in Europe, six in Canada and two in Japan.
Blow Hot Blow Cold
• Contracts track cooling degree days or heating degree days • Frost days in the Netherlands and monthly /seasonal snowfall in Boston and New York are newly added varients • Heating degree day (HDD) and cooling degree day (CDD) are indices that reflect demand for energy to heat or cool
Calculation
• HDD is calculated over a period of time by adding up the differences between mean daily temperatures and the "balance point" temperature of 18°C, (above which the building is assumed not to need any heating).
Example
• An ice-cream vendor sells more ice-creams during hot summers but has to settle for a lower income if the summer is mild • Weather derivatives can help protect his income during mild summers. Here's how: Vendor will buy a weather derivative. Thus, if the summer is mild, he will receive money to make good the lost income but he will not receive any money if the summer is hotter or normal.
END
Disclaimer
This presentation has been prepared to provide awareness & information purpose only. While every effort has been made to assure the accuracy of the information contained herein, any affirmation of fact in this presentation material shall not create an express or implied warranty that any example or description is correct. This material has been made available on the condition that errors or omissions shall not be made the basis for any claims, demands or cause of action. The information provided, has been taken from sources believed to be reliable, but is not guaranteed by the FTKMC as to accuracy or completeness , and is intended for the purposes of education and information only. The Rules and Regulations of the Exchange should be consulted as the authoritative source on all contract specifications and regulations.
doc_564688923.ppt
Describes about new products in commodities market viz. freight, electricity, carbon credit and weather.
Contemporary Issues & New Products.
Contemporary Issues
• • • • • • • • • • •
Can Indian exchanges be price setters Inflation and Commodity Exchanges Drivers of Operational Efficiency Exchanges to reform agri supply chains, warehouse developments APMCs acts amendments Taxation reforms Exchanges to infuse market inclusive economic growth Ban’s & Suspensions Domestic vs. International Exchanges Financial Lieracies initiatives FCRA Act
Commodities: New Entry?
Commodities
Freight
Electricity
Carbon Cr
Weather
INTANGIBLES
Freight
• A Freight derivative is a financial instrument for trading in future levels of freight rates, for dry bulk carriers and tankers
• These instruments are settled against various freight rate indices usually traded over the counter, but screenbased trading is gaining popularity
Freight Derivatives
• Freight derivatives are used by shipowners and operators, oil companies, trading companies and grain houses as tools for managing freight rate risk.
• Freight is a unique product, help organizations hedge cost of freight beforehand against possible price rise in future shipments
Some Facts
? The Baltic Exchange, with 550 members, already offers
offshore freight derivatives services to shippers
? Exchange provides daily freight market prices and a market for freight futures known as Forward Freight Agreements
? High cost of transporting dry commodities such as coal, grain and iron ore by sea has popularized Freight derivatives which help corporations to freeze their transportation costs
Freight Exchange in India • Baltic Exchange is a 250-year- old institution and the only established and self-regulated global market for shipbrokers, ship owners and charters
• Freight derivatives will make the industry competitive
CARBON CREDIT
Carbon Credit
• Carbon credits are a tradable commodity which help to reduce greenhouse gas emissions by giving them a monetary value
• A single credit gives the owner the right to emit one tonne of carbondioxide • International treaty, the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce
Market for CC
• • • Countries, in turn, set quotas on the emissions of businesses National CDM Authority Businesses that are over their quotas must buy carbon credits for their excess emissions
•
•
Businesses that are below their quotas can sell their remaining credits
Allowing credits to be bought and sold has created a futures market
•
Developed countries are bound by the Kyoto Protocol to cut greenhouse gas emissions between 2008 and 2012 by at least 5 per cent of the 1990 level
Market for CC
• Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price • There are exchanges which offer carbon credit contracts, the Chicago Climate Exchange the European Climate Exchange MCX in India
• The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control formalized in the Kyoto Protocal, international agreement between 169 countries • For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions • Managing emissions is one of the fastest-growing segments in financial services with a market worth about $30 billion, but which could grow to $1 trillion within a decade.
The Way it Works
3 Mechanisms have been set up
• Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
• JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost • Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project
The Way it Works
• Carbon credits are awarded to countries that are successful in reducing emissions of greenhouse gases • The main gases emitted by industries are methane, nitrous oxide, hydroflurocarbons, etc, which increase the atmosphere's ability to trap infrared energy • Under IET, countries can trade in the international carbon credit market. • Countries with surplus credits can sell them to countries with reduction commitments under the Kyoto Protocol.
Example of carbon credits
• Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to pollution
• Assume a factory XYZ produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have to say 80,000 tonnes
• XYZ either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
Example continued……….
• XYZ would buy the carbon credits on an open market from organizations that have been approved to sell legitimate carbon credits • Seller of a carbon credits might be a company that will have planted trees which draw a tonne of carbon dioxide from the atmosphere or have set up pollutant control systems • In effect XYZ might pollute a tonne, but is essentially now paying another group to go out and plant trees
Opportunities
• Since Carbon Credits are tradeable instruments with a transparent price, financial investors have started buying them for pure trading purposes • Private players earn Carbon Credits by carrying out environment friendly projects and sell them on the exchanges • Developing countries maintain that the major responsibility of curbing emission rests with the developed countries • Polluters Pay: Developed countries have polluted the most. (A cap on emissions would effectively mean a cap on a countries growth)
ELECTRICITY
Electricity
• • • •
Unique Aspects instantaneous delivery non-storability interactive delivery system extreme price volatility
Other Commodities in the Energy Sector • Oil • Coal • Natural gas (Launched 1990)
(Note: Underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand)
Globally
• Traded in futures market in the US, the UK, Australia, Sweden, Norway, Finland, Denmark, France and Germany. … and India
MCX has diversified a basket of energy products which includes :• crude oil, • furnace oil, • aviation turbine fuel • electricity • MCX platform accounts for 98 per cent of the entire energy related future market
Basics of Electricity Futures (US experience)
• Privatization of the electricity has led to Increased competition in bulk power and retail electricity markets • Greater price volatility as the industry moves away from administered cost-based rates and towards market-driven prices • Price volatility introduces new risks for generators, distributors and consumers • Electricity futures and other derivatives can help market participants manage, or hedge, price risks in a competitive electricity market
Electricity Futures
• The New York Mercantile Exchange (NYMEX) introduced electricity futures on March 29, 1996 • In a competitive electricity market, daily fluctuations in electricity prices will be the most dramatic manifestation of price volatility • Customers on real-time rates will face prices that may daily increase and decrease by more than 100% • Distribution companies buy power from generators in a spot market and sells power through fixed price contracts
Electricity Futures affects….
• Sudden rise in spot prices due to a supply shortage, would result in the distributor losing profits. This unacceptable risk would be mitigated by hedging • Similarly utilities and generating companies may find themselves in a position where they face competition from power generation from another fuel and will also resort to hedging
Meets Criteria
3 broad criteria for successful futures markets: • Prices are volatile • Diverse universe of buyers and sellers • Product is fungible. “Stored" in the form of: • Spare generating capacity • or Fuel inventories at power stations
Contract Specification
CBOT® ComEdK HUB ELECTRICITY FUTURES SALIENT FEATURES Trading Unit 1,680 megawatt hours (MWh) Price Basis U.S. dollars and cents per megawatt hour Tick Size $0.01 (1¢) per MWh ($16.80 per contract) Daily Price Limits The maximum permissible price fluctuation in any one day shall be $7 per MWh above or below the preceding day's settlement price for month succeeding the nearby trading
month.
Trading Hours Contract Months 8:00 a.m.-2:40 p.m., Chicago time Monthly: number of listed contracts
Contract Specification
Position Limits Reportable Position Last Trading Day Delivery Location Delivery Rate Delivery Times
Subject to determination by CBOT Board of Directors 25 contracts (in any one month) Trading will terminate on the fourth business day prior to the first calendar day of the delivery month Commonwealth Edison’s Control Area 5 MW Every on-peak hour (6:00:01 a.m. through 10:00:00 p.m., Chicago time) for all on-peak days of the delivery month
Delivered Power Amount depends on the number of on-peak days in the delivery month: 1,520 MWh for delivery months with 19 on-peak days 1,600 MWh for delivery months with 20 on-peak days 1,680 MWh for delivery months with 21 on-peak days 1,760 MWh for delivery months with 22 on-peak days 1,840 MWh for delivery months with 23 on-peak days Ticker Symbol BZ2
Weather Derivatives
• Financial instruments that can be used as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions • The underlying asset is rain/ temperature/snow/frost • Farmers can use weather derivatives to hedge against poor harvests caused by drought or frost • Theme Parks / sports events may want to insure against rainy weekends • Gas and power companies may use heating degree days (HDD) or cooling degree days(CDD) contracts to smooth earnings
Early Days
• the Chicago Mercantile Exchange introduced the first exchange-traded weather futures contracts in 1999 • The CME currently trades weather derivative contracts for 18 cities in the United States, nine in Europe, six in Canada and two in Japan.
Blow Hot Blow Cold
• Contracts track cooling degree days or heating degree days • Frost days in the Netherlands and monthly /seasonal snowfall in Boston and New York are newly added varients • Heating degree day (HDD) and cooling degree day (CDD) are indices that reflect demand for energy to heat or cool
Calculation
• HDD is calculated over a period of time by adding up the differences between mean daily temperatures and the "balance point" temperature of 18°C, (above which the building is assumed not to need any heating).
Example
• An ice-cream vendor sells more ice-creams during hot summers but has to settle for a lower income if the summer is mild • Weather derivatives can help protect his income during mild summers. Here's how: Vendor will buy a weather derivative. Thus, if the summer is mild, he will receive money to make good the lost income but he will not receive any money if the summer is hotter or normal.
END
Disclaimer
This presentation has been prepared to provide awareness & information purpose only. While every effort has been made to assure the accuracy of the information contained herein, any affirmation of fact in this presentation material shall not create an express or implied warranty that any example or description is correct. This material has been made available on the condition that errors or omissions shall not be made the basis for any claims, demands or cause of action. The information provided, has been taken from sources believed to be reliable, but is not guaranteed by the FTKMC as to accuracy or completeness , and is intended for the purposes of education and information only. The Rules and Regulations of the Exchange should be consulted as the authoritative source on all contract specifications and regulations.
doc_564688923.ppt