Emission Asset Class
Figure 6: EUA/CER Spread
Figure 7: EUA Futures & Risk Free Rate
Source: Eurex
Source: Eurex
In such a situation, an institution can sell EUAs for verypositivewithPhaseIIIoftheEUETScreatingatightercap.
December 2009 delivery, invest the proceeds to buy allowances Recently, the influential London Accord in a recent report said
for future delivery at a price less than the original sale price that institutional investors should be putting money into CO
2
less the interest earned. Selling December EUA at €13.68 markets. EEX/Eurex CO
2
derivatives give existing carbon
investing over a three year period in a plain vanilla swap market participants and institutional investors cheap access to
equates to a profit of €1.32 per EUA. carbon market ‘beta’ and the opportunity to generate alpha
with the added attraction of substantially reduced
CO
2
Derivatives & Portable Alpha Investing – counterparty risk and the added flexibility of transacting off-
The Next Development exchange whilst reaping the benefits of the Eurex Clearing
As the CO
2
derivatives market grows and matures then House with the Eurex OTC Block Trade facility.
•
unquestionably portable alpha investing will emerge amongst
CO
2
investment products.
10
Exchange traded CO
2
derivatives
Eurex – The International Derivatives Exchange
will allow the separation of alpha and beta returns allowing With more than 685 million contracts traded in the global
institutional investors to ‘port’ the alpha return of a carbon
Eurex network during the first quarter of 2009, Eurex is the
investment vehicle to a benchmark beta investment. For
world’s leading derivatives exchange. Our 400+ members have
example, in a portable alpha investment portfolio a European
global access to a broad range of financial products such as
derivatives on international benchmark indexes and the most
pension fund manager matches the funds liabilities to its
liquid fixed income markets. Eurex also offers trading and
assets by buying long dated Eurex Euro-Buxl
®
Futures (their diversification opportunities in commodity derivatives. With the
beta investment). They feel that a carbon fund manager can
acquisition of International Securities Exchange (ISE) in
give them a diversified, uncorrelated return to his beta
December 2007, Eurex significantly expanded its network into
investment. However, the pension fund manager does not
the US. Aside from operating a fully electronic trading platform,
Eurex provides an automated and integrated clearinghouse
want to have exposure to the carbon market that is not the
www.eurexchange.com
beta return/exposure but just the alpha return. The fund
manager uses EEX/Eurex CO
2
derivatives to separate the beta
Footnotes:
1. Carbon 2009: Emission trading coming Home, Point Carbon, March 2009.
return and the alpha return of the CO
2
fund.
2. Ibid
3. Point Carbon, CDM & JI Monitor.
Conclusion
4. Ibid
5. UNFCCC, 2009 CDM Statistics.
With the US, Australia and Japan introducing emissions
6. There have been a number of studies on carbon asset pricing, Benz and
Truck (2008), Daskalakis, Psychoyios and Markellos (2007),
trading systems in the near future it is conceivable that CO
2 Seifet, Uhrig-Homburg and Wagner (2006) and Uhrig-Homburg and
trading will reach levels to surpass that of trading in many
Wagner (2007).
7. See B.Baldwin, Derivatives: Increasing the efficiency of Fund Management,
global commodities. The US already has the regional RGGI
Pensions World, December, 2004 for application of exchange-traded
scheme which has developed into the third largest carbon
derivatives in fund management.
8. Under this method changes in historical price volatility of the contracts
market with a federal a cap-and-trade market potentially
would result in a change in the ratio and the number of contracts in the
reaching three times the size of the EU ETS. CO
2
as an asset
overlay.
9. Allocation of coming year EUA allowances (February 28 of each year)
class has great attraction for institutional investors because of
occurs before previous year compliance (on April 30 of following year) in
its non-correlation to the traditional asset classes of
effect allows borrowing.
10. See B. Baldwin, Using Exchange Traded Derivatives in Portable Alpha
governmentbondsandequitieswiththeoutlookforCO
2
prices
Investing, Pensions World, December 2005.
110 worldPower 2009
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