Michael Sheren, former Bank of England senior advisor and co-chairman of G20 said that carbon was going to be close to a currency and that next on the agenda was the tokenization of nature and biodiversity!
- CO2 is becoming a global CURRENCY!
- H2O is becoming a global CURRENCY!
- O2 & N2 are becoming global CURRENCY!
- SUNLIGHT is becoming global CURRENCY!
- WEATHER is becoming global CURRENCY!
- You become valued as part of a global CURRENCY!
HOW WILL WE START TOKENIZING THE CARBON FOOTPRINTS - COP27 Climate Conference 2022 in Egypt
"So central banks are also starting to understand natura has real value.
Carbon, we already figured out and carbon very quickly moving to a system where it's going to be very close to a currency, basically being able to a ton of absorbed and sequestered carbon and being able to create a forward pricing curve with financial service architecture, documentation.
I just came out of a meeting this morning, how we are trying to accelerate that.
To be quite honest, not very boring on financial topics and things, but there ar going to be derivatives and you need is the documentation, if you want to trade derivatives in the market place and all this matter for the natura as well.
I am going to quickly hand off but again, I want to talk about value one more time, because the southern part of the World has value, far greater than large elements of the northern part and we start thinking about and putting prices on water on trees on biodiversity. We find where do that sit.
I am doing a lot of work out of Asia and I say that my next near neighbor Indonesia is a life lung of the World and obviously Brazil is the right and Africa absolutely critical and we need their natural capital as a system based World more than we need that 60 billion we have got at the basement of The Bank of England. So how do we, and I am hoping at least from the central bankers point of view, how do we start tokenizing, how do we start building systems that actually not only create the value but transfer the value around the World."
GRETA THUNBERG - “IF WE CAN SAVE THE BANKS, THEN WE CAN SAVE THE WORLD”
"I mean, it is the money, is there. If we can save the banks, we can save the world!?"
Greta Thunberg as an obviously naive mentally handicapped person is perfect for repeating propaganda, but after saying this stupid sentence the artificially and systematically brainwashed and more stupid audience is applauding.
The conversation is published by Naomi Klein, who herself is a top propagandist of the Geoengineering Lobby, on The Intercept. Naomi Klein with her own publications plays the role of a pseudo-socialist who "campaigns for climate protection".
GRETA THUNBERG ON THE CLIMATE FIGHT: “IF WE CAN SAVE THE BANKS, THEN WE CAN SAVE THE WORLD”
Greta Thunberg joined Naomi Klein this week for a conversation on the climate emergency.
Naomi Klein September 13 2019, 5:26 p.m.
https://theintercept.com/2019/09/13/greta-thunberg-naomi-klein-climate/
Why tokenize carbon credits? Ways to attract investors to environmentally-friendly projects.
Mar 10, 2022
"According to the McKinsey report, by 2018, one-third of investments of the largest investment funds representing over $31 trillion was allocated in accordance with environmental and social criteria. The green agenda has been getting a lot of prominence throughout the last year not only in the political arena but in the investment circles as well.
Watch the Stobox Insights to learn how you can use tokenization to leverage the green agenda more effectively, and specifically its manifestation in the form of carbon credit programs, so it is easier for you to attract investors to environmentally-friendly projects.
A carbon credit is equal to one metric tonne of carbon dioxide, so companies that emit fewer greenhouse gasses and thereby underuse their allotted credits can trade them privately or on exchanges to others expecting to exceed their limit.
Tokenization mechanism allows to securitize carbon credits into exchange tradable assets, similar to traditional commodities, and makes it easier to offset a carbon footprint. The use of blockchain technology allows for reliable and transparent tokens issuance, distribution, and pricing.
Carbon credits are awarded to certified projects that reduce carbon emissions or directly capture emitted carbon dioxide. By purchasing carbon credits from these environmentally friendly businesses, corporations finance green projects, creating an additional incentive for developing green technologies."
This new carbon currency could make us more climate friendly
Sep 19, 2017
Why tokenize carbon credits? Ways to attract investors to environmentally-friendly projects.
Mar 10, 2022
"According to the McKinsey report, by 2018, one-third of investments of the largest investment funds representing over $31 trillion was allocated in accordance with environmental and social criteria. The green agenda has been getting a lot of prominence throughout the last year not only in the political arena but in the investment circles as well.
Watch the Stobox Insights to learn how you can use tokenization to leverage the green agenda more effectively, and specifically its manifestation in the form of carbon credit programs, so it is easier for you to attract investors to environmentally-friendly projects.
A carbon credit is equal to one metric tonne of carbon dioxide, so companies that emit fewer greenhouse gasses and thereby underuse their allotted credits can trade them privately or on exchanges to others expecting to exceed their limit.
Tokenization mechanism allows to securitize carbon credits into exchange tradable assets, similar to traditional commodities, and makes it easier to offset a carbon footprint. The use of blockchain technology allows for reliable and transparent tokens issuance, distribution, and pricing.
Carbon credits are awarded to certified projects that reduce carbon emissions or directly capture emitted carbon dioxide. By purchasing carbon credits from these environmentally friendly businesses, corporations finance green projects, creating an additional incentive for developing green technologies."
This new carbon currency could make us more climate friendly
Sep 19, 2017
"Just as many of us are clogging up our bodies with invisible calories, so every day we clog up our world with invisible greenhouse gases. Wouldn’t it be great if we could count, take control of and reduce our carbon emissions just as we take control of our diets?"
"We might not realise it, but every financial transaction has a climate consequence – whether it is obvious, such as filling up your car with petrol or booking a long-haul flight, or subtle, like when you buy a coffee or a new pair of shoes, or even increase your cloud storage plan. Our daily choices leave a carbon footprint. We know this, and we are all aware of the monumental climate risks posed by carbon emissions. Demand for solutions is growing."
The Paris climate agreement codified the pressure on countries to reduce their emissions and companies are increasingly under the same spotlight from investors, shareholders, employees and customers to reduce their carbon footprint, demonstrating that their business models are aligned with delivering a stable climate. Consumers, led by socially conscious millennials with increasing buying power, want to purchase greener products and invest in sustainable projects. In fact, 72% of people between the ages of 15 and 20 are willing to pay extra for environmentally and socially responsible products and services. But until now, despite huge advances in technology, monitoring and reducing our impact on the planet has been difficult.
"Carbon credits, which put a price on carbon reductions and provide revenue for such forestry protection projects, therefore represent a clear way in which companies and individuals can be empowered to reduce or offset the negative or unavoidable impact of their business and choices on the environment. By placing a value on the ecosystems that support our planet, carbon credits internalise the invisible costs of everyday choices and allow a sustainable market place to emerge."
However, since its inception, carbon trading has suffered from some issues that have suppressed its potential. The market is beset by a lack of visibility, which prevents people from trusting the carbon credit as an asset. Differing standards and regulations in different jurisdictions and the potential for double counting (where the same credit is sold more than once) have resulted in a lack of confidence from potential market participants. And without a universal ledger it isn’t easy to track how much carbon you’ve used or – if you offset it – what the impact of your reduction has been on a tangible level. As an individual, it is hard to incorporate carbon credits into your daily life.
Yet even if every country satisfied their Paris commitments to reduce carbon emissions, this would still not be sufficient to create a safe climate. Individuals and businesses will need to do more to plug this gap, and we urgently need to find a way to help them do this, while working on longer-term shifts in parallel.
This is where blockchain technology comes in. Put simply, blockchain is the name for a digital ledger in which transactions (often made with "tokens" or a cryptocurrency such as bitcoin) are recorded chronologically and publicly. Applying this to carbon credits to create a "carbon currency" is the key to demystifying and consolidating the carbon market so it can scale up. Carbon credits are the perfect candidate for a digital currency as they are data-driven, rely on multiple approval steps and exist separately to the physical impacts to which they correlate.
Imagine a world in which carbon emissions and credits can be tracked transparently and reliably. Retailers will be able to sell a product and take into account the carbon impact it creates at the same time. Governments will be able to measure, track and trade emissions transparently. And crucially, for the first time consumers will be able to understand the environmental impact of the products they are buying – both positive and negative – at the point of sale, and will be able to mitigate this in an instant, with millions of micro-transactions scaling up to make a huge collective impact.
Momentum is building towards natural solutions to climate change, and not a moment too soon. Pressure on businesses from consumers to improve the sustainability of their supply chains and their products will soon be matched by regulatory pressures and quotas if we are to stand any chance of reversing the climate damage that is a reality today.
It is not an overstatement to say that we all need to take responsibility for the carbon consequences of every choice we make. What is exciting is that by creating a global, trusted and accessible carbon currency, with the help of new digital technologies available to us, we are on the cusp of being able to do so.
First Crypto Token For Carbon Credits Is Here!
byViolet George, January 14, 2022
https://carbonherald.com/first-crypto-token-for-carbon-credits-is-here/
One MCO2 Token is the equivalent of one carbon credit from a certified forestry project and burning a token on the Moss platform is equal to offsetting 1 metric ton of carbon dioxide.
The project directly contributes to the funding of conservation efforts and the reduction of greenhouse gas (GHG) emissions.
Relevant: Hemp Blockchain To Measure CO2 Removal Of Hemp Farms
And another way in which Moss has made use of blockchain technology – NFTs.
The platform has obtained economic rights and tokenized governance to small areas in the Amazon forest into non-fungible tokens or NFTs.
Hence, it allows anyone to purchase a small piece of land in the Amazon to protect it from deforestation.
One MCO2 Token is the equivalent of one carbon credit from a certified forestry project and burning a token on the Moss platform is equal to offsetting 1 metric ton of carbon dioxide.
The project directly contributes to the funding of conservation efforts and the reduction of greenhouse gas (GHG) emissions.
Relevant: Hemp Blockchain To Measure CO2 Removal Of Hemp Farms
And another way in which Moss has made use of blockchain technology – NFTs.
The platform has obtained economic rights and tokenized governance to small areas in the Amazon forest into non-fungible tokens or NFTs.
Hence, it allows anyone to purchase a small piece of land in the Amazon to protect it from deforestation.
The US dollar could go digital. Here’s what you need to know
Catherine Thorbecke, CNN Business
Updated 11:28 AM EST, Fri March 11, 2022
https://edition.cnn.com/2022/03/11/tech/us-digital-dollar-cbdc
The Federal Reserve defines CBDCs as “a digital form of central bank money that is widely available to the general public.” A key difference from current forms of digital cash in a bank account or payment app is that the money would be a liability of the Fed and not commercial banks — hence the “central bank money.” This means it would be an actual US dollar in digital form, not an investment in a cryptocurrency or a holding in your PayPal.
There are differing opinions on how this would work and what it would look like, but in theory it could alleviate the need for third-party processors when transferring money.
“At a very high level, a CBDC is just digital money that would be issued by the central bank,” Sarah Hammer, the managing director of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania, told CNN Business. “It would be based on the fiat currency of that country, so it would be based on the money supply — and then it would be implemented using a government database or approved private sector entities working with the government.”
How globalists & governments push digital ID through climate, COVID, cybersecurity & CBDC
The lengths to which public and private entities will go to in justifying their digital identity rollouts are seemingly never ending: perspective
Tim Hinchliffe Oct. 13, 2022 at 1:15 pm
https://sociable.co/government-and-policy/how-globalists-governments-digital-id-climate-covid-cybersecurity-cbdc/
"Unelected globalists and governments alike are pushing digital identity schemes through multiple entry points including climate, COVID, cybersecurity, and CBDC.
"Unelected globalists and governments alike are pushing digital identity schemes through multiple entry points including climate, COVID, cybersecurity, and CBDC.
These digital ID entry points include, but are not limited to:
- Digital ID for Climate: To track individual carbon footprints and prove climate refugee statuses
- Digital ID for COVID: To mandate vaccines passports leading to mass compliance while providing the digital framework
- Digital ID for CBDC: To adopt identity verified solutions in order to eliminate anonymity and record every transaction
- Digital ID for Cybersecurity: To exploit cyberattacks as a means to kickstart national identity systems and to create a passport to the metaverse
- Digital ID for Convenience: To create an all encompassing, interoperable framework in order to enable all life situations
It can be used to determine what products, services, and information are available to you, and it can certainly be used by public and private entities to deny you that access."
CBDCs, Carbon Credits, and the carbon constrained world
MAY 20, 2022
|IN OPINION, SUSTAINABILITY, TECHNODE GLOBAL INSIDER |BY ZIJIAN KHOR
https://technode.global/2022/05/20/cbdcs-carbon-credits-and-the-carbon-constrained-world/
"The current international rules and regulations for MRV (Measurement Reporting and Verification) are not confirmed. Therefore, the discussions and negotiations are mainly between the developed countries with large groups of scientists and trained climate negotiators. The developed nations will not disadvantage themselves in the negotiation, and hence the developing nations who are unfamiliar with this space/pay little attention to this will likely be disadvantaged or exploited.
In the future, the MRV rules define Carbon Credit generation, countries that can find ways to generate more credit, i.e money or Carbon Credits, have the potential to rebalance or change the balance of the current geopolitical situation.
As wars, hot or cold, are fighting for control of resources, be it trade, trade routes, or mineral resources, the future conflict may be sparked by MRV and control of carbon-generating resources. With carbon credit being a virtual resource and value (think of KlimaDAO), the coming war(s) for control may also be fought in the Metaverse instead.
Tying all these together, we can’t escape from a Carbon constrained world. Being public enemy number #1, Carbon will face the combined force of humanity’s intellect and action. Like it or not, companies large and small need to be ready for such a future. What can you do as a CEO?
- A simple way is to hedge your bets. Since international standards have not been agreed upon, purchasing carbon offsets or credits from a multitude of sources may ensure some wins in the future.
- Start your own forestry/carbon sink project. Even though it may not mean/ cost much now, many expect the value of credits to exponentially increase by 2030. You can also position your company as a sustainable one!
- Have plans to green your supply chain, and execute them when needed. Being a net-zero emissions company (or even a carbon-negative one) will bring you more good than harm in the future."
THE URGENCY OF CBDC
https://cbdc-conference.com/
"Central Bank Digital Currency (CBDC) has recently taken the financial world by storm.
Inevitably, the question arises: What were the drivers behind such rapid and impressive development?
Just a few years ago, Central Bank Digital Currency (CBDC) was still attracting very little interest. Only a handful of central banks were even looking into it. If at all, discussions about CBDC were often held behind closed doors.
Then, however, a number of central banks began implementing pilot projects with the aim of better understanding the challenges associated with CBDC. A multitude of studies have also been published on this topic.
At the same time, technological innovations facilitated the advent of cryptocurrencies and, in the wake of Facebook’s announcement of plans to introduce Libra, CBDC was thrust into the spotlight almost overnight."
Environmental Implications of a Central Bank Digital Currency (CBDC)
https://openknowledge.worldbank.org/handle/10986/37702
"Two-thirds of central banks in the East Asia and Pacific (EAP) region have started researching or testing the implementation of a Central Bank Digital Currency (CBDC). At the same time, the region accounts for one-third of world CO2 emissions and is vulnerable to climate risks.
As the Group of 7 (G7), European Central Bank (ECB), and Bank of England (BoE) have stated in their public statements, it is increasingly important to consider environmental impact when designing CBDC. However, only a few brief studies have been done on this subject, which will be crucial for the region.
This Note explores the environmental implications of CBDC by comparing technical mechanisms and energy consumption within its distributed structure. It also illustrates differences in ecological footprint between CBDC and other payment methods (cryptocurrency, cash, and card networks).
As the legitimacy of CBDC is backed by the trust of central banks, CBDC does not need to prove its legitimacy through its technological structure.
Therefore, CBDC does not require the energy-intensive consensus or mining mechanisms used by a cryptocurrency, so its energy consumption is lower (comparable to that of a credit card system).
CBDC can be designed to use various systems, such as Real Time Gross Settlement (RTGS), Distributed Ledger Technology (DLT), or a mixture of both. Careful deliberation to meet the objectives and implications will be important as CBDC can be a catalyst for financial innovation."
Press release |26 October 2022
https://www.bis.org/press/p221026.htm
Twenty banks in Hong Kong SAR, Thailand, mainland China and the United Arab Emirates used the mBridge platform to conduct 164 payment and foreign exchange transactions totalling over $22 million.
The pilot advances multi-CBDC experimentation by settling real value directly on the platform
The BIS will present the mBridge pilot at Hong Kong Fintech Week, along with updates on Project Aurum (retail CBDC) and Genesis 2.0 (green finance)
The Bank for International Settlements (BIS) and four central banks have completed a successful pilot of the use of central bank digital currencies (CBDCs) by commercial banks for real-value transactions across borders, as part of Project mBridge.
The BIS Innovation Hub Hong Kong Centre joined forces with the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China and the Central Bank of the United Arab Emirates. As detailed in a new report, 20 banks in the four jurisdictions used the mBridge platform to conduct 164 payment and foreign exchange transactions totalling over $22 million over six weeks, settled directly on the platform.
Project mBridge envisions an efficient, low-cost, regulatory-compliant and scalable cross-border payment solution with CBDC at its core. The experiment was designed to operate across different jurisdictions and currencies, to explore the capabilities of distributed ledger technology and the application of CBDC in cross-border payments between commercial banks.
The project is part of the ongoing efforts to experiment with new technologies to deliver faster, cheaper and safer cross-border payments and settlements, a priority identified by the G20. Many jurisdictions, in particular emerging and developing economies, are losing access to the
international network of correspondent banking services, leaving many households and firms without sufficient or affordable access to the global financial system for payments.
By enabling peer-to-peer and instant exchange of multiple CBDCs on a single network, Project mBridge aims to solve long-standing inefficiencies in cross-border payments and foster greater financial inclusion and innovation in international payments.
"Financial exclusion is not just a problem for individuals; it is also affecting economies," says Cecilia Skingsley, Head of the BIS Innovation Hub. "This project makes important strides towards developing a platform that has the potential to foster more inclusive and efficient payments systems that will benefit those making and receiving payments in different currencies and jurisdictions as well as the overall functioning of the global financial system."
The BIS will continue to work on this and similar projects to explore the user requirements, technical specifications, and governance framework needed for interoperable CBDCs. The mBridge project team will continue building the technology and testing it with a view to producing a product with enough features to be used by early adopters in the year ahead and a production-ready system thereafter.
The results of the pilot are to be presented at Hong Kong Fintech week, running from 31 October to 4 November, along with two other Hong Kong Centre projects:Project Aurum, conducted with the Hong Kong Monetary Authority and the Applied Science and Technology Research Institute, created a prototype technology stack comprised of a wholesale interbank system and a retail e-wallet system. The system brings to life two different types of retail tokens: intermediated CBDC and CBDC-backed stablecoins. The latter is unique in the study of CBDC to date, backing the stablecoin with CBDC held in the interbank wholesale system. The source code is being made available in the BIS Open Tech platform, thus accessible to central banks exploring the best possible architecture for a retail CBDC.
Project Genesis 2.0 demonstrates the technical feasibility of tokenised green bonds associated with so-called carbon forwards, or mitigation outcome interests. These are digitally tracked and automatically delivered to investors, as explained in a report. Genesis 2.0 is a collaboration between the BIS Innovation Hub's Hong Kong Centre, the Hong Kong Monetary Authority, the UN Climate Change Global Innovation Hub and private sector partners.
The concept of derivative trading is actually rather old. The first proven example of a derivative transaction happened around 600 BC. Back then, an ancient Greek philosopher and mathematician, Thales of Miletus, became the world’s first derivative trader. He predicted a bumper harvest season of olive oil based on the meteorology observations and his knowledge of astronomy. Thales positioned himself to profit from rising oil prices by negotiating “call options” on olive oil presses for delivery in the spring.
Today, derivatives have become so popular because they are based on the monetary value of an asset rather than the tangible asset itself. It gives traders and investors a unique opportunity to trade currencies, commodities and stocks without an actual need of buying them.
One of the most common reasons why traders implement derivative trading in their overall strategy is to speculate on an asset’s future price. However, derivatives are also used for risk management and hedging. As a matter of fact, many use these financial instruments to make sure that they do not suffer from unfavourable price movements in the future.
Derivatives can also be used with leverage, which provides the ability to take a more significant position with a smaller amount of initial capital – maximising both the potential profits and potential losses. Even a small movement in the price of an underlying asset can result in a large difference in a derivative’s value."
A Quick Guide to Weather Derivatives
"Q. What is a weather derivative?
A weather derivative is a risk management product that allows a company to protect itself
against adverse weather. Unlike conventional weather insurance where the payout is based
on a demonstrated loss (“indemnification”), the payout of a weather derivative is based on a
weather index (“parametric”). For example, the index used could be millimetres of rainfall or
cumulative temperature using observations from a single weather reference site or a basket
of sites.
Weather derivatives are most often used to address the “volume risk” that a company faces.
For example, a gas distributor may sell less gas in a mild winter thereby reducing profit.
However, weather hedges can also be linked to a commodity price: for example a payout may
be linked both to the oil price and weather conditions.
Most weather contracts are over-the-counter (“OTC”) structures tailored specifically to suit the
exposure of a particular business.
The first weather derivatives traded in the late 1990s."
Weather Derivative
By ALI HUSSAIN, Updated May 20, 2022, Reviewed by THOMAS J. CATALANO
https://www.investopedia.com/terms/w/weatherderivative.asp
"What Is a Weather Derivative?
A weather derivative is a financial instrument used by companies or individuals to hedge against the risk of weather-related losses. The seller of a weather derivative agrees to bear the risk of disasters in return for a premium. If no damages occur before the expiration of the contract, the seller will make a profit—and in the event of unexpected or adverse weather, the buyer of the derivative claims the agreed amount.
KEY TAKEAWAYS
- A weather derivative is a financial instrument used by companies or individuals to hedge against the risk of weather-related losses.
- They trade over-the-counter (OTC), through brokers, and via an exchange.
- Weather derivatives work like insurance, paying out contract holders if weather events occur or if losses are incurred due to certain weather-related events.
- Agriculture, tourism and travel, and energy are just a few of the sectors that utilize weather derivatives to mitigate the risks of weather."
What Investors Should Know About Trading Water in the Futures Market
Published on January 12, 2021, By Insights Editorial Team
https://insights.bu.edu/what-investors-should-know-about-trading-water-in-the-futures-market/
"Investors will soon be able to trade water as other commodities over fears of a future scarcity of the resource. What is futures trading, and how does it differ from other forms of investing? What does the ability to trade water mean for the futures market? Professor of Finance Jerome Detemple discussess the Water Futures contract now being traded on the futures market and what it means for investors.
Investors will soon be able to trade water as other commodities over fears of future scarcity of the resource. What is futures trading, and how does it differ from other forms of investing? What does the ability to trade water mean for the futures market? Can other resources be added to this list, and if so what are the criteria?
Professor of Finance Jerome Detemple sits down with Insights@Questrom to discuss the Water Futures contract now being traded on the futures market and what it means for investors.
WHAT IS A FUTURES CONTRACT?
The water futures contract is written on the Veles California Water Index (NQH2O), which is quoted on the Nasdaq. The futures contract is settled in cash. The contract unit is 10 times the value of the index. The long position receives the difference between the spot price of the NQH2O Index and the settlement price, adjusted by the contract unit. The spot price is the water index published on the third Wednesday of the delivery month. Contracts with delivery dates for 8 consecutive quarters plus the nearest two months are available on the exchange. Each delivery date is the business day prior to the third Wednesday of the contract month. The water futures was introduced on the CME on December 7, 2020.
WHAT IS THE VELES CALIFORNIA WATER INDEX (NQH2O)?
The NHQ2O index is the volume-weighted average price of new water right transactions in the 5 most active Californian water markets, namely Surface Water, Central Basin, Chino Basin, Main Basin, and Mojave Basin Alto Subarea. The average is calculated from transactions over a one-week period, Monday through Friday. The index is updated each Wednesday based on the prior week transaction data. Quotation is in US dollars per acre-foot (AF). An acre-foot equals 325,851 gallons of water: if represents the volume of water required to cover an acre of land to a depth of 1 foot. The NQH2O index was introduced on the NASDAQ on October 31, 2018.
WHY IS WATER NOW A COMMODITY THAT CAN BE TRADED IN THE FUTURES MARKET?
Water has been a scarce resource in some countries for years. In the United States, states or regions have experienced severe droughts at times. Recently, California experienced its longest recorded drought since 1895. It officially began on December 27, 2011 and ended on March 5, 2019. At its peak, during the week of July 29, 2014, 58.24% of the state reached exceptional drought (D4) status.
Droughts affect the spot price of water because they cause imbalances between supply and demand. Excess demand increases the price of water reflecting the scarcity of the resource. The severity of droughts can lead to significant fluctuations: past data show the water index rocketed to about $850 per AF in June 2014 from below $300 per AF in March 2014.
Price fluctuations impact users, e.g., agricultural, and urban users. Agricultural users need water to irrigate crops. Urban users, comprising municipal, residential, commercial, and industrial entities, employ water for various purposes, e.g., heating and cooling, power production, parks irrigation, etc… Fluctuations expose users to price risk. Derivatives, such as futures contracts, written on NQH2O enable users to manage that risk. The need to manage price risk creates a demand for futures on NQH2O. The existence of a quoted water index permits the development of such contracts.
WHAT CRITERIA MUST AN INDEX MEET TO BE TRADED IN THE FUTURES MARKET?
https://insights.bu.edu/what-investors-should-know-about-trading-water-in-the-futures-market/
"Investors will soon be able to trade water as other commodities over fears of a future scarcity of the resource. What is futures trading, and how does it differ from other forms of investing? What does the ability to trade water mean for the futures market? Professor of Finance Jerome Detemple discussess the Water Futures contract now being traded on the futures market and what it means for investors.
Investors will soon be able to trade water as other commodities over fears of future scarcity of the resource. What is futures trading, and how does it differ from other forms of investing? What does the ability to trade water mean for the futures market? Can other resources be added to this list, and if so what are the criteria?
Professor of Finance Jerome Detemple sits down with Insights@Questrom to discuss the Water Futures contract now being traded on the futures market and what it means for investors.
WHAT IS A FUTURES CONTRACT?
A futures contract is an agreement between two parties to buy or sell an underlying asset at a future date against payment of a pre-determined price. The underlying asset can be a financial asset, a commodity or a currency. The buyer has a long position in the contract, the seller has a short position. The future date is called the delivery date. The pre-determined price is the futures price; it is paid (by the long position) or received (by the short position). The cost of initiating a futures contract is null: the futures price is calculated so that the present value at the initiation date of the future net cash flow is null.
Futures contracts can be settled in two ways: physical delivery or cash settlement. In the first case, the underlying asset is delivered at the delivery date. In the second case only cash changes hands. Futures contracts are marked to market: daily variations in the futures price are credited/debited to the accounts of the parties. Forward contracts are similar to futures contracts, except they are private contracts between two parties and all transactions and cash flows occur at the delivery date. They are exposed to counterparty (default) risk. Futures contracts are standardized products traded on public exchanges. Positions can be closed at any time and markets are typically liquid. Counterparty risk is insignificant.
WHAT ARE THE CHARACTERISTICS OF THE WATER FUTURES CONTRACT?
Futures contracts can be settled in two ways: physical delivery or cash settlement. In the first case, the underlying asset is delivered at the delivery date. In the second case only cash changes hands. Futures contracts are marked to market: daily variations in the futures price are credited/debited to the accounts of the parties. Forward contracts are similar to futures contracts, except they are private contracts between two parties and all transactions and cash flows occur at the delivery date. They are exposed to counterparty (default) risk. Futures contracts are standardized products traded on public exchanges. Positions can be closed at any time and markets are typically liquid. Counterparty risk is insignificant.
WHAT ARE THE CHARACTERISTICS OF THE WATER FUTURES CONTRACT?
The water futures contract is written on the Veles California Water Index (NQH2O), which is quoted on the Nasdaq. The futures contract is settled in cash. The contract unit is 10 times the value of the index. The long position receives the difference between the spot price of the NQH2O Index and the settlement price, adjusted by the contract unit. The spot price is the water index published on the third Wednesday of the delivery month. Contracts with delivery dates for 8 consecutive quarters plus the nearest two months are available on the exchange. Each delivery date is the business day prior to the third Wednesday of the contract month. The water futures was introduced on the CME on December 7, 2020.
WHAT IS THE VELES CALIFORNIA WATER INDEX (NQH2O)?
The NHQ2O index is the volume-weighted average price of new water right transactions in the 5 most active Californian water markets, namely Surface Water, Central Basin, Chino Basin, Main Basin, and Mojave Basin Alto Subarea. The average is calculated from transactions over a one-week period, Monday through Friday. The index is updated each Wednesday based on the prior week transaction data. Quotation is in US dollars per acre-foot (AF). An acre-foot equals 325,851 gallons of water: if represents the volume of water required to cover an acre of land to a depth of 1 foot. The NQH2O index was introduced on the NASDAQ on October 31, 2018.
WHY IS WATER NOW A COMMODITY THAT CAN BE TRADED IN THE FUTURES MARKET?
Water has been a scarce resource in some countries for years. In the United States, states or regions have experienced severe droughts at times. Recently, California experienced its longest recorded drought since 1895. It officially began on December 27, 2011 and ended on March 5, 2019. At its peak, during the week of July 29, 2014, 58.24% of the state reached exceptional drought (D4) status.
Droughts affect the spot price of water because they cause imbalances between supply and demand. Excess demand increases the price of water reflecting the scarcity of the resource. The severity of droughts can lead to significant fluctuations: past data show the water index rocketed to about $850 per AF in June 2014 from below $300 per AF in March 2014.
Price fluctuations impact users, e.g., agricultural, and urban users. Agricultural users need water to irrigate crops. Urban users, comprising municipal, residential, commercial, and industrial entities, employ water for various purposes, e.g., heating and cooling, power production, parks irrigation, etc… Fluctuations expose users to price risk. Derivatives, such as futures contracts, written on NQH2O enable users to manage that risk. The need to manage price risk creates a demand for futures on NQH2O. The existence of a quoted water index permits the development of such contracts.
WHAT CRITERIA MUST AN INDEX MEET TO BE TRADED IN THE FUTURES MARKET?
General guidelines for an index to serve as a benchmark for a derivative contract are provided by the International Organization of Securities Commissions. Principles pertain to benchmark governance, benchmark quality, and accountability. Principles regarding quality stipulate that benchmarks must be observable and reflect competitive forces in an active market. Governance principles contain clauses seeking to eliminate conflicts of interest.
These conditions were deemed to be satisfied for the water futures by the regulator. It may be noted that a party participating in the index determination process provides advisory services in the spot water market underlying the index, and those individual transactions used for the index calculation are not observable by outside parties. These elements are non-standard aspects of contract design.
WHAT ARE THE BENEFITS OF TRADING WATER FUTURES?
These conditions were deemed to be satisfied for the water futures by the regulator. It may be noted that a party participating in the index determination process provides advisory services in the spot water market underlying the index, and those individual transactions used for the index calculation are not observable by outside parties. These elements are non-standard aspects of contract design.
WHAT ARE THE BENEFITS OF TRADING WATER FUTURES?
Trading water futures provides informational benefits and risk management benefits. If the market is sufficiently liquid, the futures price reflects information pertaining to future spot market conditions: the existence of the futures market facilitates price discovery. This information helps users and owners of water rights plan for the future.
Users of water can hedge water cost fluctuations by taking positions in the futures contract. In case scarcity develops and the spot price of water increases by delivery time, a hedged user with immediate water needs at that time can offset the additional cost of buying water on the spot market with the proceeds from the futures contract. The existence of the water futures helps to smooth costs over time and avert potential bankruptcies.
The water futures is most relevant to users in California or adjacent regions subject to similar water scarcity factors. Even within those confines, the potential risk management benefits are limited by the fact that scarcity risk appears to be different across locations comprising the NQH2O.
WHAT ARE THE BENEFITS OF WATER FUTURES FOR SOCIETY?
Users of water can hedge water cost fluctuations by taking positions in the futures contract. In case scarcity develops and the spot price of water increases by delivery time, a hedged user with immediate water needs at that time can offset the additional cost of buying water on the spot market with the proceeds from the futures contract. The existence of the water futures helps to smooth costs over time and avert potential bankruptcies.
The water futures is most relevant to users in California or adjacent regions subject to similar water scarcity factors. Even within those confines, the potential risk management benefits are limited by the fact that scarcity risk appears to be different across locations comprising the NQH2O.
WHAT ARE THE BENEFITS OF WATER FUTURES FOR SOCIETY?
By helping users to manage scarcity risk, water futures contribute to the integrity of supply chains, i.e., the availability of agricultural products, during periods of stress. But they do not help to alleviate factors underlying scarcity risk, e.g., emissions of heat-trapping gases. More general mechanisms and regulations are needed to address these fundamental aspects.
HOW WOULD YOU ADVISE INVESTORS TO NAVIGATE TRADING WATER?
HOW WOULD YOU ADVISE INVESTORS TO NAVIGATE TRADING WATER?
The water futures contract on NQH2O has the potential to be a useful risk management tool for users and owners of rights to water resources within the geographical region concerned. The contract provides a flexible instrument to hedge undesirable water price fluctuations and limit their economic impact. Market liquidity will prove essential for extracting potential benefits and ensuring contract success. Traders need to carefully consider the risks involved: spot price risk, liquidity risk, local risk factors, and regulatory risk, among others."
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