Question

Explain the following future contracts and the risk management solutions they provide:

1. Certified Emissions Reductions (CER) futures

2. Eurodollars futures

3. European Union Allowance (EUA) futures

4. EURIBOR futures

Answer 1

Answer-  

Q 1)

The Certified Emissions Reductions (CER) futures is a deliverable contract where each Clearing Member with a open position at the end of trading for a contract month is obliged to make or take delivery of CER units to or from the Union Registry in accordance with the ICE Futures Europe Regulations.

CER Futures are edging out carbon financial instruments in developing countries to reduce carbon emissions and improve nations.

Q 2)

Eurodollar futures can be used as a hedging tool for interest rate fluctuations on Eurodollars. These are trading strategies that can be employed with Eurodollar futures including bundles, pack, butterflies and holding short and long positions. They offer higher yields because they are not subject to U.S. bank regulation.

The advantages are high levels of liquidity and low levels of intraday volatility which create an opportunity for traders using a market making type of trading.

Q 3)

The European Union Allowance (EUA) futures is a deliverable contract where each Clearing Member with an open position at the end of trading for a contract month is obliged to make or take delivery of Carbon Emission Allowances to or from the Union Registry in accordance with ICE Futures Europe Regulations.

The risk management is that each EUA is entitled to emit one tonne of carbon dioxide equivalent gas.

Q 4)

Thee 3 -month EURIBOR contract traded on NYSE Euronext is the reference contract for short term Euro interest rates with an average volume of 1 million contracts exchanged every day. It is traded 20 hours a day and can be traded in Asia, the United States and Europe.

The Euribor futures rates are efficiently traded and stabilises the interest rates.