Energy trade
Short Description
Energy trade basics...
Description
Energy Derivatives
Sonal
Agenda
History Introduction to Exchange Open outcry system Instruments Types of Traders
Agenda
History Introduction to Exchange Open outcry system Instruments Types of Traders
History
The first exchange for trading derivatives appeared to be the Royal Exchange in London, which permitted permitt ed
forward contracting of tulip bulbs around !"#$ The first %futures% contracts are generally traced to the &odoya rice mar'et in Osa'a, (apan around !)* +hicago oard of Trade in -.- / +hicago was a ma0or center for the storage, sale, and distribution of 1idwestern grain$ These central mar'etplaces provided a place for buyers and sellers 2 such as farmers and grain dealers 2 to meet, set 3uality and 3uantity standards, and establish rules of business$
Futures/Forward Contracts History
y -#*4s these forward contracts had become standardi5ed 6grade, 3uantity and time of delivery7 and began to be traded according to the rules established by the +hicago oard of Trade 6+T7
The +hicago 1ercantile Exchange was established in 88$
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Futures/Forward Contracts History Cont’d
-8 the 1inneapolis 9rain Exchange organi5ed the first complete clearinghouse system
the clearinghouse acts as the third party to all transactions on the exchange designed to ensure contract integrity buyers:sellers re3uired to post margins with the clearinghouse daily settlement of open positions / became 'nown as the mar'/mar'et system
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Futures/Forward Contracts History Cont’d
Key point is that commodity futures (evoving from forward contracts! deveoped in response to an economic need "y suppiers and users of various agricutura goods initiay and ater other goods/commodities - e#g metas and energy contracts Financia futures - fi$ed income% stoc& inde$ and currency futures mar&ets were esta"ished in the '’s and )’s - faciitated the sae of financia instruments and ris& (of price uncertainty! in financia mar&ets #
*ption Contracts - History
+hicago oard Options Exchange 6+OE7 opened in ;pril of 8#"
call options on ! common stoc's
The widespread acceptance of exchange traded options is commonly regarded as one of the more significant and successful investment innovations of the 8#*4s Today we have option exchanges around the world trading contracts on various financial instruments and commodities
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*ptions Contracts +hicago oard of Trade +hicago 1ercantile Exchange orwards >utures Options ?waps
nstruments
Instruments Derivatives
.hysica *C +pot
E$change
Forwad *ptions
Forward
+waps
*ptions
Future
; financial instrument whose value is dependent upon or derived from one or more basic variables$ The derivative itself is merely a contract between two or more parties$ @alue is determined by fluctuations in the underlying asset$ Often the variables underlying derivatives are the prices of traded assets$ ;re simply methods to manage 6 hedge7 ris'$
Derivatives
>utures, forwards, swaps, options
Derivative 0 Key Characteristics
>inite time hori5on 6i$e$ fixed expiry date7
Re3uires at least two counterparties
Represent a 5ero/sum game between the counterparties$ That is, a gain to one side is a loss to the other side$
The =ayoff is based on the value of the underlying$
1ses of Derivatives 2is& management ncome generation Financia engineering
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.roduct Characteristics
3oth options and futures contracts e$ist on a wide variety of assets
*ptions trade on individua stoc&s% on mar&et inde$es% on metas% interest rates% or on futures contracts Futures contracts trade on agricutura commodities such as wheat% ive catte% precious metas such as god and siver and energy such as crude oi% gas and heating oi% foreign currencies% 1#+# reasury "onds% and stoc& mar&et inde$es
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.roduct Characteristics (cont’d!
he underlying asset is that which you have the right to "uy or se (with options! or to "uy or deiver (with futures!
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.roduct Characteristics (cont’d!
Listed derivatives trade on an organi4ed
e$change such as the Chicago 3oard *ptions E$change or the Chicago 3oard of rade% the 56,E7 or the ,ontrea E$change
OTC derivatives are customi4ed products
that trade off the e$change and are individuay negotiated "etween two parties -
.roduct Characteristics (cont’d! *ptions are securities and are reguated "y the +ecurities and E$change Commission (+EC! in the 1#+ and "y the 8Commission des 9aeurs ,o"iieres du :ue"ec’ or the Commission 2esponsi"e for 2eguating Financia ,ar&ets in :ue"ec for the ,ontrea *ptions E$change Futures contracts are reguated "y the Commodity Futures rading Commission (CFC! in the 1#+ and +3 in 1#K#
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Forward Contracts Forward contract is a non-standardi4ed contract "etween two parties to "uy or se an asset at a specified future time at a price agreed upon today# Auture time/ ;ny time in future when the delivery is to be made$ A=rice ;greed upon Today/ =rice is mutually decided at the time of entering into the contract$ A9enerally done in OT+ mar'et
How Forwards wor&s## Forward Contract ; A agree to 3uy = "" of Crude ? @=;/"" from 3 on >= st ,arch %=>
Cash +ettement (>=/>/=>! .hysica +ettement (>=/>/=>! @=;K = "" oi
*2
+uppose Crude .rice as on >=/>/=> is @==/"arre(oss to "uyer! @= @= +uppose Crude .rice as on >=/>/=> is @=>/"arre(profit to "uyer!
Example(Normal forward contract) BP enters into a one month contract with its customer to sell 1mmbtu of natural gas @ !"mmbtu# to be deli$ered on 1%th &ebruar'#1*+ ,f price in exchange is %"mmbtu on+ -hen there will be a loss of "mmbtu to BP
E$ampe(Hedging! BP now enters into a one month futures contract with ./E to bu' 1mmbtu of natural gas @ !"mmbtu#to be deli$ered on 1%th &ebruar'#1*+ ,f price in exchange is %"mmbtu on + -hen there will be a pro0t of "mmbtu to BP Net eect2
Futures Bhat is Futures ,ar&et A ocation where trading ("uy-se! in commodities is conducted in accordance with specific rues% procedures% and guarantees#
Futures (Contd#! &3-34ES .5N-46.-S A contractua agreement to "uy /se a particuar commodity or financia instrument at a predetermined price in the future#
Betail the 3uality and 3uantity of the underlying asset$ ?tandardi5ed to facilitate trading on a futures exchange$ ?ome futures contracts may call for physical delivery of the asset, while others are settled in cash$ ixed for floating exchange of ris' =urely a financial transaction 2 no delivery +ettement If floating price lower than fixed 6swap7 price 2 swap provider pays swap buyer If floating price is higher than fixed 6swap7 price 2 buyer pays seller:provider$
E$ampe 0 four month fi$ for 3rent crude oi at @;J# "" (an >eb 1arch ;pril >loating price 6J:bbl7 K.$)* K.$#) K)$.* Guantity 6bbls7 *,*** *,*** *,*** ;ctual cost J K.),*** K.#,)** K).,*** K!-,*** +wap seer pays
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