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8/3/2019 Derivatives Market India
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CURRENCY, ENERGY & OTHERDERIVATIVES IN INDIA
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INTRODUCTION
Derivatives: Securities whose value is derived
from the prices of other underlying securities
Currency Derivatives: Underlying assets are
currencies of different countries
Energy Derivatives: Underlying assets are
energy products like oil, natural gas, electricity
etc
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CURRENCY DERIVATIVES
Introduced in India in August 2008, only by
NSE
Forward and Futures, Swaps and Options
Used by Speculators, Hedgers and
arbitragers
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ENERGY DERIVATIVES
Energy markets are most rapidly developingamong the derivative instruments
Started after fundamental restructuring ofworld petroleum market during 1970s
Main applications:
Risk management (Hedging)
Speculation (Trading)
Investment portfolio Diversification
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COMMON ENERGY DERIVATIVES
Futures Exchange traded
Essentially financial
Forwards
Over the counter (OTC)
Physicals
Swaps
OTC
Financials
Options
Exchange traded or OTC
Physical or financial
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COMMON ENERGY MARKETS
New York Mercantile Exchange
(NYMEX)
Tokyo Commodity Exchange (TOCOM)
Intercontinental Exchange (online)
Over the counter
Broker
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CURRENCY DERIVATIVES
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CURRENCY DERIVATIVES
Currency Pairs (USD-INR),(GBP-INR) etc.
Fixed Exchange Rate
Floating Exchange Rate
Quotes, Tick Size (smallest size by which the stock/instrumentvalue can increase/decrease), Spreads, Spot and Forwardtransactions
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CURRENCY FORWARDS
Agreements to exchange currencies at fixedrate on a specific date
Actual Settlement > T+2
Forward margin
Bilateral contracts, counter party risk
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CURRENCY FUTURES
Exchange Traded and Standardized
PricingSimple Interest , F/S = (1 + Rh)/(1 + Rf)
Continuously Compounded Interest, F = S*e(rhrf)*T
rh MIFOR rates, rf LIBOR rate
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CURRENCY OPTIONS
Similar to stock options, e.g. USD INR
Intrinsic value and time value
Knock-out, Knock-in , Average rate, Basket
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CURRENCY DERIVATIVES IN INDIA
Currency Forwards OTC products
Residents, NRIs, Overseas Corporates, banks,FIIs
Currency Futures traded on NSE, BSE andMCX
Currency options OTC products
July 2003, banks and corporate entities cantrade
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CURRENCY SWAPS
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CURRENCY SWAPS
Exchange of principal and interest in onecurrency for another
Fixed for fixed
Floating for floating
Cross currency
Not standardized and hence not traded
through an exchange
IBM British Petroleum
Dollar 6 %
Sterling 5%
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CURRENCY SWAPS
Transform Liabilities and Assets
Comparative Advantage:
Case: GE (20 million AUD) & Qantas (15 millionUSD)
Company
USD AUD
GE 5% 7.6%
Quantas 7% 8%
GE QuantasFinancialInstitution
USD 5% USD 6.3%
USD 5%AUD 6.9% AUD 8%
AUD 8%
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CURRENCY SWAPS: INDIA
July 7, 1999: RBI gave permission for swaps
Liberalization measure: Permission to avail forwardcover and enter into swaps without any limit subject
to genuine underlying exposure
Foreign Currency RupeeSwaps
Cross Currency Swaps
- Resident in India
- Long-term foreign currencyor rupee liability
- Hedge or transform exposure
- Entities with borrowings inforeign currency under ECB
- Hedge or transformexposure
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ENERGY DERIVATIVES IN INDIA
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WHERE IS IT TRADED IN INDIA?
National Commodities & DerivativesExchange Ltd. (NCDEX)
Multi Commodity Exchange Ltd. (MCX)
Indian Commodity Exchange Ltd. (ICEX)
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CRUDE OIL
Worlds Primary energy consumption supply Crude oil is used as diesel fuel (petrol-
diesel), fuel oils, gasoline (petrol), jet fuel,kerosene and liquefied petroleum gas (LPG).
Transport relies to well over 90 percent
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CRUDE OIL & INDIA
India is 6th largest consumer of crude oil &70% imported
Average consumption 2.7 million barrels perday during 2006 and 2008
3rd largest importer of crude oil in the world
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MARKET INFLUENCING FACTORS - OIL
OPEC output and supply Terrorism, Weather/storms, War and any other
unforeseen geopolitical factors that causes supplydisruptions
Global demand particularly from emerging nations Dollar fluctuations Refinery fires & funds buying
Exchanges dealing in Crude Futures
The New York Mercantile Exchange (NYMEX) . The International Petroleum Exchange of London (IPE). The Tokyo Commodity Exchange (TOCOM).
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MARKET MOVING FACTORS - COAL
Coal demand dependent on energy demand Influenced by oil and gas Macro-economic factors like global economic scenario,
currency fluctuations, geo-political tensions, interest rates,
prices of other assets, commodities etc
World Thermal Coal Markets
Intercontinental Exchange (ICE)
Offers European and South African coal contracts, runs theworlds most liquid coal derivative market
Chicago Mercantile Exchange
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COAL (CONTINUED..)
MARKET INFLUENCING FACTORS NATURAL
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MARKET INFLUENCING FACTORS NATURAL
GAS
Changes in supply or demand Demand-side : Strength of economy, weather &
crude oil prices Supply side : Variations in natural gas
production, imports & storage levelsHurricanes and severe weather can disrupt supply
Macro-economic factors exchange rates,interest rates and other economical indicators
World Market : CME
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NATURAL GAS & INDIA
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MCX
MCX's world ranking No.1 in Silver No.2 in Gold, Copper & Natural Gas and No.3 in Crude Oilin terms of number of futures contracts traded in 2009As per data compiled from respective exchange websites
Traded Energy derivatives ATF Brent Crude Oil Crude Oil Electricity Monthly & Weekly
Gasoline Heating Oil Imported Thermal Coal Natural Gas
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ENERGY DERIVATIVES TRADED ON NCDEX
Energy Derivative Quotation / BaseValue
Period of Contract
Crude Oil Rs / Barrel 3 month
Thermal Coal Rs / MT 1,2 month
Brent Crude Oil Rs / Barrel 1,2,3 month
Natural Gas Rs / mmBTU 1,2,3 month
Gasoline Rs / USGLN 3 month
Heating Oil Rs / USGLN 2,3 month
1 BARREL = 42 US GALLONS = 158.98 LITRES
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ICEX
Crude Oil
Natural Gas
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COMMODITY TRADING ON THE EXCHANGES
Trading Timings for most of the Energy commodities
Mondays through Fridays 10:00 AM to 11:30 PM10:00 AM to 11:55 PM (day light saving)
Saturdays 10:00AM to 02:00 PM
Expiry Date 11:30 PM / 11:55 PM
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FUTURE IN ENERGY TRADING
Introduction of Options
Banking Sector
Mutual Funds
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ELECTRICITY DERIVATIVES
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PRODUCT STRUCTURE
Underlying Electricity Hedge against UI Risks
Evenly distributes Transmission losses Contracts types:
Weekly Monthly 3 months or 6 months
Yearly Seasonly
Delivery : Through State and National grids Units: MWh Lot size: 10
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INTERNATIONAL MARKET
Electricity futures were first traded on the NYMEX inMarch 1996
Products-
Plain vanilla electricity call and put options
Options based on attributes like volume, delivery locationand timing, quality, and fuel type
Spark spread options as non-standard cross-commodityelectricity options with payment as the difference
between the price of electricity sold by generators andthe price of the fuels used to generate it
Auction / Continuous Trading
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RELEVANCE IN INDIA
Electricity Act, 2003
Spot Trading
Total Installed Capacity 1.63 Lakh MW
Supply Demand Gap 11%
Market development production and
transmission and distribution
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REGULATIONS
Financial Risk to Ratepayers
Market Power
Conservation and demand Features of Contract
Quality Specification
Transmission
Alternative Delivery Procedure
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WEATHER DERIVATIVES
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HOW IT WORKS?
Cap on emissions
Penalty on extraemissions
KyotoProtocol
Issues carboncredits tocompanies whosaves on GHGemissions
UNFCCC Buy carbon
credits
Sell CarbonCredits
Companies
1 carbon credit = 1 tonne of CO2 orequivalent GHG.
Three ways to get carbon credits:1. Joint Implementation Projects
(ERU)2. Clean Development Mechanism
(CER)3. International Emission Trading
(RMU)
Current Markets for CarbonTrading
1. Over the counter trading is71% & rest is throughexchanges
2. Countries who ratified KyotoProtocol. Major market inEurope
3. Non Kyoto markets also exist
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DEMAND & SUPPLY SCENARIO
Source: World Bank
India has 33%of CDMProjects
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CHARACTERISTICS OF PRODUCTS
Factors influencing price Supply-demand mismatch
Policy issues
Crude oil prices Coal prices
CO2 emissions
Weather/Fuel prices
Risks involved
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MARKET IN INDIA
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BENEFITS OF CARBON CREDITS
Reduced emissions- Is it really happening?
UK has very low share of emissions
Alan Greenspans Argument
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THANK YOU