(Refiles to fix dateline)
Dec 7 (Reuters) - Coal is now a fully commoditised product that is traded actively in the United States, Europe and the Asia-Pacific region. Financial derivatives contracts are also traded in large volumes by power utilities, coal producers, trading companies, and banks to hedge or lock in profits.
The following derivative instruments are traded in the market:
This is a standardised contract used to sell and buy physical coal whereby delivery is deferred beyond the transaction date. Although the delivery is made in the future, the price is determined on the initial trade date.
Forward contracts can be used as instruments to buy or sell physical coal as well as a financial instrument for hedging or speculating purposes.
INDEX-LINKED FORWARD CONTRACT
A forward contract by which the price is not fixed at some specific level but is linked to an agreed price index during the period of delivery of coal.
This is purely a paper hedging instrument by which the end-user can secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved.
A spread is a trading technique derived from forward and swaps trading. It refers to buying or selling the differential between contract prices of two different periods (for example, prices of May and June), which is called the inter-month spread; or differential between prices of two related products (for example the price of coal and electricity, which is called the dark spread); or differential between prices of coal from different geographic regions, such as the price of coal in South Africa versus the price of coal at Australia’s port. (Reporting by Fayen Wong; Editing by Himani Sarkar)