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Japan's deregulating gas and power markets are driving LNG importers to hedge their exposure to new price risks, spurring the creation of an increasingly liquid market in LNG derivatives.
Hedging LNG imports is largely a matter of the importer buying a "JCC swap," a financial contract linked to the Japan Crude Cocktail, from a financial institution such as Goldman Sachs or Morgan Stanley -- the two biggest banks involved in this trade. While this hedges the base component of most of Japan's LNG imports, importers also need to buy and sell options contracts to deal with the "S-curve" in their own LNG purchase contracts. "The consumer doesn't want to reveal exactly where their 'kink points' [changes in the slope of the S-curve] are to the banks, but over time the...