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May 17, 2004 at 08:00 PM
NEW YORK (HedgeWorld.com)–The New York Board of Trade introduced ethanol futures and options, to trade alongside sugar contracts, in response to the growing market for the environment-friendly gasoline additive.
Energy trading companies, oil refiners, gasoline blending and marketing firms as well as ethanol producers are expected to use the contract for hedging and making bets on price movements.
Demand for ethanol is projected to double by 2010, largely because of new laws being passed by various countries to reduce pollution and dependence on oil. Until the introduction of this instrument, futures for the alternative fuel existed only in Brazil.
“This contract is needed,” said NYBOT President and Chief Executive Harry Falk, in a speech during the launch ceremony. He noted that the ethanol contract is a mirror image of the NYBOT sugar contract.
Volatility
Like any futures contract, the ethanol contract will be used either to lock in prices on prospective sales or purchases or to speculate on the direction of future price changes or price relationships, according to Ira Kawaller, a commodity trading adviser in Brooklyn, N.Y.
Mr. Falk says there is interest from gasoline blenders to use the contract to hedge their ethanol costs. The price has been volatile in the past year, creating more risk for users, so some of them would prefer to lock it in. He expects that eventually ethanol futures will become another component of the energy market.
Traders can take advantage of differentials between the prices of ethanol and sugar as these change, said Jeanette Schwarz Young of JA Schwarz Market Analytics. She trades sugar and financial futures on NYBOT.
If ethanol becomes more popular, its price would rise faster than the price of sugar and there may be inefficiencies ripe for arbitrageurs. A study has shown a correlation of nearly 70% between the prices of ethanol and sugar.
