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Role of Markets and Exchange

Role of Markets and Exchange. Role of Spot Market. Actual transfer of assets for capital between actual users Present demand-supply matching leads to price discovery Commodity spot markets require physical infrastructure to transfer / store goods Price Discovery Process

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Role of Markets and Exchange

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  1. Role of Markets and Exchange

  2. Role of Spot Market • Actual transfer of assets for capital between actual users • Present demand-supply matching leads to price discovery • Commodity spot markets require physical infrastructure to transfer / store goods • Price Discovery Process • Auctions for spot markets • Real time Order matching

  3. Role of Futures Market • Risk transfer platform from actual users to traders /speculators • Helps hedger concentrate on core activity • Long term price signals helps • Entrepreneurs, Corporate managers in • Investment / capital expenditure decisions • Locking price of future production & hedging input costs- credit enhancement • Risk Mitigation - Cost of Capital reduced No forwards market without robust spot price discovery

  4. Role of an Exchange • Anonymous auction platform • Price Discovery by matching of demand-supply • Neutrality - conflict of interest avoided • Transparent real time, pan-geographic price dissemination • Benchmark reference price • Liquidity to participants Thermometer of underlying sector temperature

  5. Role of an Exchange • Standardized specifications - contract structure • Standard margining system • Eliminates credit rating • Risk Management in a volatile market • Robust Clearing & Settlement systems - counter party credit risk absorbed • Fair,Safe, orderly market - rigorous financial standards and surveillance procedures

  6. Products in Energy Markets • Petroleum products • Crude oil, Gasoline, Gasoil, Heating Oil • Natural Gas • Electricity • Coal • Synthetics – spark spreads, crack spreads , • Weather Index • Energy Indices

  7. Market Development Futures Exchange OTC Markets Market Maturity Auction markets Multiple buyers & sellers Time To be an energy hub all these markets are required

  8. Importance of Forward Curve and Liquidity • Forward Curve allows producers and consumers to get long term price signals • For capital intensive projects long term price signals is important to financial closure • Liquidity reduces credit risk of the contract • Allows the risk of the system to be transferred out of the power sector • Socially optimal to transfer risk from risk averse to entities with high risk appetite

  9. Electronic Commodity Trading—Indian experience • Well established robust futures market • Electricity trading is unique but still follows the laws of supply and demand • Log normal price behavior • Credit risk issues are central to successful design of Indian power market

  10. SPAN Trading System Risk management PRISM Clearing& Settlement Technology VSAT Leased line Trading Terminal Trading Terminal internet Trading Terminal Linkage to Clearing bank Linkage to Warehouse Linkage to Depositories Exchange Architecture

  11. Thank You

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