Dollar Cost Averaging (cont.)
Since it is almost impossible to consistently buy at the bottom of the market and sell
at the top, a strategy can be employed that averages out the highest of the highs and
the lowest of the lows to produce consistent results. This strategy, known as dollar
cost averaging, enables a utility to achieve consistent results by spreading out the buying
or selling of allowances over a period of time. Doing so hedges the risk that prices will
move aggressively against one by buying or selling in small increments at the current
best available price. Under this strategy, the average price will be near to the annual
average price.
Rise of Advanced Structures
These circumstances have given rise to the use of sophisticated structures, which
have become commonplace in other commodities markets in emissions trading. Despite
the fact that most emissions market participants are utility personnel more comfortable on
a turbine floor than a trading floor, many have gotten over the initial learning curve
and are starting to become active in the emissions market.
The rise of advanced structures can also be pegged to the growing experience of the average emissions trading participant. An increasing amount of the activity in the market today contributes to liquidity and hinges on financial plays. Most trades take place in order to ensure compliance, but an increasing number of transactions are structured to capture value in the market's movement much like the transactions in commodities markets.