Emission Asset Class
Figure5: BenefitsofIncorporatingaNon-CorrelatedAssetClass
substantially reduced counterparty risk
compared to its OTC equivalents, with the
transaction cleared through a centralised
clearinghouse.
Factors Affecting the EUA/CER Spread:
•
UNFCCC Negotiations – Post Kyoto
agreement targeted for December 2009 in
Copenhagen, to adopt a new treaty setting
out climate change mitigation measures with
a direct impact on carbon markets.
•
EU ETS Policy – Supply of allowances,
introduction of new industries and EUA
Source: Eurex
auctions will affect EUA prices.
•
Governments & Corporates Outside EU –
1. Calculate the appropriate number of Eurex Dow Jones For example, the Japanese Voluntary Emission Trading
EURO STOXX 50
®
Index contracts to be sold to reduce Scheme will buy CERs to meet emissions targets.
European equity holdings by 10%:
•
New Trading Schemes – Especially market developments
Value of equity holding / Value of Dow Jones EURO STOXX in North America and the efforts of the new US
50
®
Index. administration to establish a mandatory cap-and-trade
Future X beta X 10% = €100 million / €23,3407 X 1.23 X system post 2012.
0.10 ~ 527 futures contracts.
•
SupplyofCERs–Governed by the number of CDM projects
and their approval (or rejection) by the UN will affect CER
2. Calculate the ratio of each of the futures contracts’ risk prices.
positions based on historical price volatility:
•
Substitution Effect – High gas prices will increase the use
Dow Jones EURO STOXX 50
®
Index Future 2,334 (index of coal and drive up carbon prices.
price) X 35.597% (30-day historical price volatility) = 831
•
EconomicDownturn–Weak economic growth will impact
= €8,310. carbon prices; and likewise.
EEX/Eurex EUA Future.
•
Weather–Very cold (heating) or very hot (air conditioning)
13.70 (futures price) X 56.76% (30-day historical price weather will boost EUA and CER prices and vice versa.
volatility) = 7.78 = €7,780.
Figure 6 below illustrates the development of the EUA/CER
Based on each of the contracts’ risk positions, the ratio of spread for the futures expiring in December 2009 for the period
Dow Jones EURO STOXX 50
®
Index Futures to EUA Futures is 1 March 2008 until March 2009.
Dow Jones EURO STOXX 50
®
Index Future: 1.1 EUA Futures. Exchange traded CO
2
derivatives, by offering prices with
Therefore, the pension fund manager would need to buy 578 maturities of up to four years, aid the forward pricing of CO
2
EEX/Eurex EUA Futures against selling 527 Dow Jones EURO structured products and offer institutions an ability to ‘forward
STOXX 50
®
Index Futures to synthetically switch 10% of the fix’ their future purchase or sale price in EUAs and CERs.
pension funds’ European equity holdings to CO
2
.
8
When the Moreover, it generates further opportunity to generate alpha
fund manager wants to switch out of CO
2
products and return by trading EUA and CER calendar spreads – with substantially
to being fully invested in European equities they unwind the reduced counterparty risk through a centralised clearinghouse.
short Dow Jones EURO STOXX 50
®
Index/long EUA Futures Equally, it can offer arbitrage opportunities.
9
For example,
position. assume the following:
1. Dec 2009 EEX/Eurex EUA Future is EUR 13.68
EEX/EurexCO
2
Derivatives–GeneratingAlpha 2. Dec 2009 to Dec 2012 discount rate is 0.916071
There are already OTC derivative structures – EUA/CER 3. Dec 2012 EEX/Eurex EUA Future is EUR 15.88
spread options and EUA/CER swaps – to trade the spread
between EUAs and CERs. With the introduction of EEX/Eurex This gives an implied December EEX/Eurex EUA 2012 Futures
CER Futures, initiating EUA/CER spread positions becomes price of €17.20 that is €15.88-[(1 - 0.916071) + 1]. Based on a
much cheaper, particularly with EEX/Eurex offering cross swap curve, a forward curve of EUA Futures can be calculated
margining between the two contracts and the benefit of and compared to actual EEX /Eurex EUA Futures (Figure 7).
worldPower2009 109
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