- 3 - Derivatives – The Next Big Thing for B2B? Shoomon Perry, March 2001 © 2001 Sixhills Consulting Ltd & Author Separation of Physical Provision from Risk Management Provision of Robust Data Another Driver A second critical factor underlying the development of new non-financial products is the provision of appropriate data. The development of robust price indices allows the formation of a cash settled derivative where a physically settled contract would be unfeasible. Examples include the prices of particular shipping routes and bulk chemicals. B2B exchanges are having an increasingly important role in the provision of these price indices. Likely Developments B2B exchanges aim to create liquid physical marketplaces, and encourage contract standardisation wherever possible. This involves creating their own price indices, providing independent grading and inspection of settled products. As has been seen in the energy markets, product standardisation is usually accompanied by greater competition, and a demand for a separation of provision and price hedging. So the long-term effects of vertical exchanges may result in even more new non-financial derivatives. Price Hedge Factory Power Supplier 5-Year Electricity Supply Agreement Factory Power Supplier Spot Power Purchase Plus Electricity Derivative Hedge Spot Power Market Derivative Exchange Speculator Power Price Hedge Power
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