BM&FBOVESPA launches cash-settled hydrous ethanol futures contracts

BM&FBOVESPA launches cash-settled hydrous ethanol futures contracts

17/05/10

BM&FBOVESPA begins trading today its cash-settled hydrous futures and options contracts. The new contracts with a price formation from the region of Paulínia, in the state of São Paulo, are authorized for trading with effect from the June 2010 delivery month onwards, under the ticker symbol ETH, from 9:00 a.m. to 3:15 p.m (Brazil time). The size of the contract is 30 cubic meters (30,000 liters), quoted in Brazilian reais and its expiration date in on the last business day of the delivery month. The maximum daily price fluctuation will be 6.5%, which shall be added to or subtracted from the previous day’s settlement price.

Starting today call and put options contracts on the hydrous ethanol futures contract will also be traded. The American-style options can be exercised by the holder from and including the first business day following the day a position has been initiated up to and excluding the expiration date, during a trading session. The unit, ticker symbols, trading hours, and expiration dates are the same as the futures contracts.

Contract settlement will have price index created by the Exchange and Cepea

The contract will be cash settled, just as BM&FBOVESPA’s live cattle and corn contracts. It will use the ESALQ-BM&FBOVESPA Hydrous Ethanol Cash Price Index Paulínia Region. The index has been published since 31 March 2010, and is calculated by the Research Centre for Applied Economics (CEPEA) of the Luiz de Queiroz School of Agriculture (ESALQ) of the University of São Paulo.

The price formation in the Paulínia region was chosen because it is the largest fuel distribution hub in Brazil. The specifications of the new contract were widely discussed with participants of Brazil’s ethanol market through BM&FBOVESPA’s Sugar and Ethanol Advisory Board. 

Reduction of price risk and hedge instruments

The objective of the contract is to help reduce the price risk of the participants of Brazil’s ethanol market, one of Latin America’s most dynamic economic sectors. The new contract will attract more participants into the ethanol market and promote the efficiency of the product’s commercialization.

The cash settlement will enable a broader participation of ethanol mills and distributors of the fuel, because it permits price fixation and the minimizing of price fluctuation, and also allows arbitrage between the physical and futures markets. Individual investors, banks, and foreign investors may also contribute to the contract’s trading.

The Exchange will continue to trade the anhydrous ethanol futures contract, with physical delivery, quoted in U.S. dollars, with price formation in the port of Santos.