The Brazilian Securities, Commodities and Futures Exchange – BM&FBOVESPA will begin to trade, on May 17, the new cash-settled hydrous ethanol futures and options contract. 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 contract will be quoted in Brazilian reais, with a price formation from the region of Paulínia, in the state of São Paulo.
The contract will be cash settled, just as BM&FBOVSPA’s live cattle and corn contracts. It will use the Ethanol Hydrated Price Indicator of Paulínia, in the state of São Paulo. The indicator has been divulged 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 Exchange hopes 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 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 debated with participants of Brazil’s ethanol market through BM&FBOVESPA’s Sugar and Ethanol Advisory Board.
The options contract’s underlying asset is the cash-settled hydrous ethanol futures contracts. The American-style options have the same expiration date as the futures contract, the last business day of the contract month.
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.