derivatives market india

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 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

derivatives market india

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