IHS Chemical Week

CHEM IDEAS

EUA Carbon Prices Rally

2:52 AM MST | December 8, 2009 | By JAMES EMANUEL, COMMERCIAL DIRECTOR, CANTORCO2E

European Union (EU)A [carbon] prices have enjoyed a strong rally in recent days. The Dec09 contract is now nearing €15.00 ($22) having traded at only €12.50 last week. Many reasons have been cited for this price climb including optimism in relation to the outcome of the Climate Summit in Copenhagen and the strong employment data from the US last week that may indicate that the end of recession is nearer than we imagined.

 

The truth of the matter is that the price is being driven primarily by the options market. There is a great deal of open interest on the €15.00 call option. Those that sold the option will manage their risk exposure using a delta hedging technique which involves buying the underlying commodity as the market price approaches the strike price. The delta is a measure of the chances of the option expiring in the money and the gamma of an option is the rate of change in the delta relative to the underlying EUA price. Consequently, as the price nears €15.00 so the gamma increases. The increase in gamma means that the delta is moving strongly requiring still more buying of the underlying commodity. The net result is that the market price of the commodity is sucked up by the option market.

 

Since the option expiry is tomorrow, 9th December, this rally will no doubt end very soon and prices will no doubt settle back down to more realistic levels.

 

 













 
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