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© NYSE Euronext. All Rights Reserved. Hedging risks with NYSE Liffe futures contract Kiev, 30 November 2011 Lionel Porte, Product Manager, Commodity Derivatives.

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Presentation on theme: "© NYSE Euronext. All Rights Reserved. Hedging risks with NYSE Liffe futures contract Kiev, 30 November 2011 Lionel Porte, Product Manager, Commodity Derivatives."— Presentation transcript:

1 © NYSE Euronext. All Rights Reserved. Hedging risks with NYSE Liffe futures contract Kiev, 30 November 2011 Lionel Porte, Product Manager, Commodity Derivatives NYSE Liffe

2 2 Legal Disclaimer Cautionary Note Regarding Forward-Looking Statements This presentation may contain forward-looking statements, including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Such forward-looking statements include, but are not limited to, statements concerning NYSE Euronext's plans, objectives, expectations and intentions and other statements that are not historical or current facts. Forward-looking statements are based on NYSE Euronext's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Factors that could cause NYSE Euronext's results to differ materially from current expectations include, but are not limited to: NYSE Euronext's ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk and U.S. and global competition, and other factors detailed in NYSE Euronexts reference document for 2007 ("document de référence") filed with the French Autorité des Marchés Financiers (Registered on May 15, 2008 under No. R ), 2007 Annual Report on Form 10-K and other periodic reports filed with the U.S. Securities and Exchange Commission or the French Autorité des Marchés Financiers. In addition, these statements are based on a number of assumptions that are subject to change. Accordingly, actual results may be materially higher or lower than those projected. The inclusion of such projections herein should not be regarded as a representation by NYSE Euronext that the projections will prove to be correct. This presentation speaks only as of this date. NYSE Euronext disclaims any duty to update the information herein.

3 Effective Hedging tool: Ingredients for success

4 4 NYSE Liffe Commodities - A Price Benchmark NYSE Liffe has a well established portfolio of Commodity futures contracts that act as price benchmarks for their respective underlying physical markets: Global Price Benchmarks – Cocoa, Robusta Coffee, White Sugar European Price Benchmarks – Milling Wheat, Rapeseed, Corn, Malting Barley UK Price Benchmark – Feed Wheat

5 5 Contract basis & price convergence The delivery mechanism should reflect the practice of the underlying physical market – and preferably be based on a current physical contract The amount available for delivery against the contract should reflect commonly traded qualities If the contract is underpinned by an index or other reference price, the market should have confidence that this is a true reflection of physical market values N.B All current major agricultural commodity futures contracts are underpinned by standardised physical delivery terms

6 6 Free market conditions Government intervention – Should be minimised but if it exists the market should be fully aware of the conditions under which intervention will be made – Quotas, embargo, taxes for exports… all kind of sudden political actions can alter their role. Price volatility – Price volatility (combined with free market conditions) is key to the successful development of commodity futures markets

7 7 Ingredients of Volatility Demand Tight supply Energy and food need InelasticDemand Uncertainty of needs Production Variables Stocks Climate changes New Producers Price Volatility Market Organizations WTO agreements, Free trade agreements CAP reforms Role of the public authorities Trading flows Currencies Information flows Freight Financial Sphere Financial investors Hedge funds Index funds A fragile balance, fierce competition, phasing out of safety nets

8 8 Market structure and access An active chain of producers, traders, processors and manufacturers Supported by a pro-active broking community (with access to finance) Global access for trading Secure and established central counterparty (CCP)

9 9 Examples of failure and success Contract (launch year)Active or InactiveRationale for success/failure Amsterdam Potato Futures (1995) Inactive (-)Index not considered true reflection of spot market values Robusta Coffee Futures (2008) Active (+)Replaced previous Contract by extending deliverable base and increasing Contract size Rapeseed Oil Futures (2006) Inactive (-)Government subsidies created abundance of cheap commodity Weather Futures (2001)Inactive (-)Limited number of market participants and limited knowledge London Potato Futures (1991) Inactive (-)Delivery convergence issues Corn Futures (2007)Active (+)Replaced previous Contract by extending deliverable base but still has scope for development

10 10 The future price is a function of the underlying and the basis (hence the notion of derivatives). The relationship between the spot and future price can widen or narrow – but (everything else being equal) the gap (known as basis) should narrow towards expiry of the future (cost of carry diminishes over time). At moment of expiry the gap is zero Futures price Spot price Basis 3 months before exp Price 2 months before exp 1 months before exp Expiration Futures Markets versus spot Markets

11 11 How it works: Futures Pricing What is the notion of fair value of prices in the market Factors impacting the future price is the cost of carry Whats in it ? The financing Interest rates and storage costs Futures prices= Spot Price + basis ( cost of carry +quality) Contango & Backwardation

12 12

13 13 Futures versus spot Market Price Time Physical Quality premium Freight Financial fees Storage Dec April May MAY March Spot Dec Basis March Basis May

14 14 Physical Markets correlation vs Futures Pricing a similar product to keep the correlation Quality Currency hedging Euro/Dollar Grain Export area North Africa, Middle East competitors Liquidity of the futures market benchmark Importance of keeping a stable basis in the time

15 15

16 16 Source : Plantureux Ukrainian Markets correlation vs Wheat Futures

17 17 Ukrainian Markets correlation vs Rapeseed Futures Source : Plantureux

18 18 Source : Plantureux Ukrainian Markets correlation vs Maize Futures

19 19 NYL Commodities: a secure, regulated market CLEARING RULES LCH Clearnet SA for Paris NYSE Liffe Clearing for London Initial margins Daily Margin calls Automatic position settlement FINANCIAL SECURITY Members equity capital requirements Clearing houses capital requirements MARKET SAFETY RULES Delivery Limits (Paris contracts) NYSE Liffe Market Surveillance AMF and FSA Regulation Individual Risk exposure

20 20 Challenges & Conclusion NYSE Liffe is a long-established and well-respected provider of Commodity futures and options Contracts. Education – many operators know the mechanism but others are new to the futures markets Education is key and the exchange will be working alongside its partners to develop understanding of futures as a pricing, trading and hedging mechanism Liquidity – it takes time to build market open interest and liquidity and all players must remain committed to the market if it is to grow and succeed A sound physical delivery basis – the Exchange and its customers must ensure that the futures markets reflect physical market practice and that there is a credible and supportive arbitration service behind the Contracts Free market conditions – futures markets thrive in free market conditions that are absent from artificial price intervention

21 21 Access to the markets Exchange Fees Agricultural Paris NYSE Liffe Commodities (Malting Barley, Milling Wheat, Rapeseed and Corn) NYSE Liffe Exchange Fee: 0.25 per lot Clearing House Fee: 0.75 per lot Total: 1 per lot Margin Requirements Outright MarginIntermonth Spread Malting Barley Futures (EOB) 1800 per lot- Milling Wheat Futures (EBM) 950 per lot 150 Rapeseed Futures (ECO) 1200 per lot 313 Corn Futures (EMA) Skimmed Milk Powder 750 per lot 3600 per lot 138 -

22 22 ISV & QV Codes for grains products QV Codes Rapeseed FuturesIJA CT PM0#COM: Milling Wheat FuturesCAA CT PV0#BL2: Corn FuturesEPA CT PZ0#EMA: Malting Barley futuresBRLA CT EOB0#EOB: Rapeseed Options IJA OMON PM0#COM+ Corn Options CAA OMON OBM0#BL2+ Milling Wheat Options EPA OMON N/A0#EMA+ Malting Barley Options BRLA OMON OOB0#EOB+ ExchangeProduct Product Symbol NYSE Liffe ParisMalting Barley FuturesyEOB NYSE Liffe ParisMilling Wheat FuturesyEBM NYSE Liffe ParisRapeseed FuturesyECO NYSE Liffe ParisCorn FuturesyEMA

23 23 NYSE Liffe – Questions & Further Information Your contacts In Paris: Lionel Porte, Product Development Web and 15 mn delayed


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