Environmental Engineering Reference
In-Depth Information
Figure 10. Relative share of on-exchange traded volumes across ECX emissions and EEX electricity
futures markets
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ity in pricing relations in emissions markets. We
analyse this price relation against the assumption
of arbitrage free market interactions between spot
and futures markets.
EUA are storable at virtually no cost and they
neither yield interest nor dividends. Assuming
efficient and arbitrage free interaction between
spot and futures markets the futures price should
equal the spot price times the compounded in-
terest for holding the underlying EUA in stock
until expiry of the future contract. However, in
many markets a significant part of spot market
demand is driven by risks of supply shortages in
the underlying. Holding the underlying in stock
then pays the so-called
convenience yield
. Posi-
tive convenience yields are typical in markets,
where the underlying is continuously needed in
production processes and even short-term supply
shortages would be very crucial.
smaller than the interest rate. It turns posi-
tive when the convenience yield is higher
than the interest rate. It follows from the
no-arbitrage relation that the cost-of-carry
and, hence, the basis converges to zero
with approaching expiry of the respective
futures contract.
•
In theory, the convenience yield for EUA
should be very low to zero in all periods
other than just before compliance dead-
lines where there could be high uncertainty
about the actual amount of EUA floating
in the market. Hence, the basis and cost-
of-carry should be driven primarily by the
interest and, hence, should present a rela-
tively smooth curve converging to zero at
final settlement of the respective future.
In Figure 11 we show the development of the
basis for the DEC 09 contract traded at ECX. The
basis is calculated against the spot EUA for period
from 2008 to 2012 traded at BlueNext.
Visual inspection of Figure 11 provides only
some sense of a negative basis converging to zero
at maturity in December 2009 for the DEC 09
•
The difference between spot and futures
prices is commonly referred to as the
basis
and is simply defined as spot price minus
futures price. Obviously, the basis turns
negative when the convenience yield is
