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SolutionsInconvenient truth: now you can hedge against it with the UBS Greenhouse IndexTurning up the heatNew index broade...
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News For Banks - Apr 2008 - UBS Greenhouse Index - Carbon Emission EUA CER CO2 Derivatives - ilija Murisic

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News For Banks - Apr 2008 - UBS Greenhouse Index - Carbon Emission Derivatives - ilija Murisic

Keywords: Carbon, CO2, Emission, EUA, CER, climate change, Index ,Kyoto, UBS, derivatives, hybrids, trading, structured products

Published in: Economy & Finance, Technology
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Transcript of "News For Banks - Apr 2008 - UBS Greenhouse Index - Carbon Emission EUA CER CO2 Derivatives - ilija Murisic"

  1. 1. SolutionsInconvenient truth: now you can hedge against it with the UBS Greenhouse IndexTurning up the heatNew index broadens the choices for investors concerned withclimate changeUnless you are a dairy farmer in Green- If it chooses, this clientele can now focus four-fifths of the combined emissions in-land, climate change is an inconvenient even more selectively on the human- dex by value, reflecting its greater underly-truth. For most such inconveniences, induced element in climate change. The ing market volumes. As index componentsthough, there is a convenient tool for recently launched UBS Greenhouse Index are weighted according to the volume ofhedging their effects. Climate change was (UBS-GHI) is a play on both temperature underlying transactions, new weather con-the exception until April last year, when trends and, indirectly, on the amount of tracts or carbon reduction schemes couldUBS launched its Global Warming Index carbon dioxide in the air, an important be added to the GHI in future, if justified(UBS-GWI). Rolling into a single instrument cause of global warming. Half the index by their popularity.a selection of intensively traded weather by value is based on the existing Global As the existence and pricing of carbonderivatives, the index offers investors a Warming Index, while the other half reduction schemes depend wholly onnew and handy way of expressing views tracks futures contracts on two princi- human agency, the GHI is a more complexon regional or national climate trends in pal markets for carbon emissions, the EU instrument than its predecessor. It shouldthe US. (See News for Banks, Winter 2007 Emission Trading Scheme (40% of the appeal to institutional investors looking foredition for more details.) index) and the Kyoto Clean Development additional portfolio diversification, reckon This invitation was taken up with enthu- Mechanism (10%). Thus the index delivers the product’s designers within UBS Invest-siasm. Since inception, the Global Warm- exposure to temperatures across a selec- ment Bank’s hybrid derivatives tradinging Index has attracted some $100 million tion of US cities, as well as prices for unit. Other users could include businessesin contracts. Even more significantly, it has carbon dioxide in the EU and for carbon exposed to the risk of adverse climatebuilt a new user base for weather deriv- dioxide reductions sold by developing change and those that need to hedgeatives. While traditional weather futures nations to developed ones. against the risk of legislation designed totend to be patronized mainly by energy For investors preferring to concen- curb carbon dioxide emissions. You couldprofessionals and a few specialized hedge trate solely on greenhouse gas emissions, even sell the index short to hedge againstfunds, the GWI has pulled in insurers, pen- a family of sub-indices is available that the unlikely risk of global warming goingsion funds, and even retail investors. GWI track either the European emissions trad- into reverse.investors have been rewarded by a 53% ing scheme or the Kyoto Clean Develop-rate of return since inception (as at mid- ment Mechanism or both in combination. Ilija Murisic UBS Investment Bank,February), as well as minimal correlation As in the emissions part of the parent in- Hybrid Derivatives Tradingwith other asset classes. dex, the European scheme accounts for ilija.murisic@ubs.com UBS News for Banks / Summer 2008 19

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