A practical Guide to Managing risk Along the Steel Supply Chain
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Transcript of A practical Guide to Managing risk Along the Steel Supply Chain
How the world advances
MeTALs
About CME Group
Astheworld’sleadingandmostdiversederivativesmarketplace,CMEGroupiswheretheworldcomestomanagerisk.CMEGroupexchangesoffer
thewidestrangeofglobalbenchmarkproductsacrossallmajorassetclasses,includingfuturesandoptionsbasedoninterestrates,equityindexes,
foreignexchange,energy,agriculturalcommodities,metals,weatherandrealestate.CMEGroupbringsbuyersandsellerstogetherthroughtheCME
GlobexelectronictradingplatformandtradingfacilitiesinNewYorkandChicago.CMEGroupalsooperatesCMEClearing,oneofthelargestcentral
counterpartyclearingservicesintheworld,whichprovidesclearingandsettlementservicesforexchange-tradedcontracts,aswellasforover-the-
counterderivativestransactionsthroughCMEClearPort.
Managing Price Risk Along the Steel Supply ChainComprehensive solutions to contain and manage exposure, maximize profi t potential
second only to the international crude oil market, the ferrous industry accounts for a signifi cant and growing amount of
the global economic activity driven by robust demand from China and other emerging economies. In recent years, this
industry has begun a transition in pricing practice from annual benchmark to shorter-term or spot market pricing.
while this adds greater accuracy and timeliness to value determination, it also brings with it higher price volatility
and fi nancial risk all along the supply chain. so how are market participants adapting and thriving in an increasingly
uncertain environment? In a word: hedging.
What does it mean to manage price risk?
Asyoufulfillyourphysicalmarketneeds,buyingrawmaterialsandmanufacturingandmovingyourfinishedproduct,commoditypricesare
constantlyonthemove,reactingtosupply,demandandthemacrofluctuationsoftheworldeconomy.Whetheryouareaminingcompany,steelmill,
servicecenter,orauto/construction/whitegoodsmanufacturer,hedgingisatoolthatcanhelpyouanticipateandmanageassociatedfinancialrisk.
How does price risk management work?
Infinancialmarketsspecifically,priceriskmanagementisthepurchaseorsaleofafuturescontractasatemporarysubstituteforacashmarket
transactiontobemadeatalaterdate.Hedgingusuallyinvolvessimultaneous,oppositepositionsintheunderlyingcashmarketandthefinancial
futuresmarket.Futuresarenotmeanttobeanalternativetopurchasingphysicalproduct,butratherapapertransactionmeanttooffsetany
potentiallossfromunexpecteddipsinhard-productprices.Simplyput,ifyouhaveanordertosellsteelatsomepointinthefutureatapre-
determinedprice,youwillwanttogaugeandmanageyourcostleadinguptothattransaction.Hedginghelpsyoudojustthisbyputtingyourindustry
knowledgeandintuitiveskillstowork,positioningyouforpotentialgaininafuturespositionthatcanoffsetanylossinthephysicalmarket.
How can I make price risk management work for me?
Theenclosedhedgingexamplesprovideaworkingillustrationofthepracticalmechanicsofhedging,anddemonstratetheimportanceof
comprehensivehedgingfrominputthroughoutput—alsoknownasamulti-hedgeapproach.Withanunderstandingofthehedgingprocess,you
willbebetterpositionedtodiscussyourgoalswithaqualifiedfuturescommissionmerchantwhocanexecuteyourhedgingplan.
Hedging ServicesIron Ore 62% Fe, CFR China Average Price Options (ICT) (ICP)
A steel mill which produces HRC for an automotive client is concerned the price of a key input cost, Iron Ore, will rise dramatically over the next 12 months
• ItisNovemberandthepriceofIronOreis$140-Thesteelmillwouldliketohedgebutisconcernedaboutthevolatilityinswapspricing
causingproblemsforthecompany
• Themilldecidestolookatoptionsasawayofhedginginsteadofswaps
• Themillcontactsitsbrokerandsaysthat,basedonitssteelcontracts,themaximumitcanaffordtopayforironorenextyearis$150
• Thebrokergoestothemarketandpurchasesthe$140strikecalloptionsforcalendaryear2012for$10inthefullrequiredvolume
It is now January and the price for Iron Ore has risen to $180/mt
>The insurance premium of $10 per contract at the $140 strike has allowed a financial profit of $30 ($140 strike minus $180 end purchase
price minus $10 premium for call = $30.). By hedging financially, the loss on the physical side was compensated – ensuring a maximum
purchase price of $150. If you had not hedged you would have incurred a real loss of $40/mt for purchasing the required Iron Ore.
It is now June and the price for Iron Ore has fallen to $100/mt
Using Options
Financial
Bought500,000mtofCalendar2012$140strikecallslinkedtoTSI
orPlattsfor$10/mt,clearedthroughCMEClearPort
TheJanuaryportionoftheoptioncontractsettlesontheExchange
at$40/mt
Financial profit or loss: $40 profit - $10 purchase price = $30/mt
Financial
Bought500,000mtofCalendar2012$140strikecallslinkedtoTSI
orPlattsfor$10/mt,clearedthroughCMEClearPort
TheJuneportionoftheoptioncontractsettlesontheExchangeat
$0/mt
Financial profit or loss: $10 purchase price of the option = $10/mt
Physical
PurchaseIronOreat$180/mtforJanuarydelivery
Thephysicalcosts$40/mtmoretopurchase,buttheprofitonthe
optioncoversmostofthis
Physical “Profit” or “Loss” = $40 price change - $30 option
profit = $10/mt
Physical
PurchaseIronOreat$100/mtforJunedelivery
Thephysicalcosts$40/mtlesstopurchasebutthepurchasepriceof
theoptioniswrittenoff
Physical “Profit” or “Loss” = $40 price change - $10 option
loss = $30/mt
>The financial loss on the option has been compensated for by the cheaper purchase price of Iron Ore on the physical side. That means
you have not only been guaranteed a maximum purchase price for iron ore of $150/mt, but you are also able to gain when the market
price for Iron Ore falls.
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
Benefits of using Options:
• Protectagainstpricevolatilityinonedirectionbutbenefitfrom
pricevolatilityintheotherdirectioneffectivelyinsuringagainst
priceexposure
• Intimesofgreatmarketstress,optionsbecomemorevaluable,soitis
possibletoprofitonanoptionhedgegiventherightadvice
• Lockinprofitmarginsandbenefitfromfallingprices
• Improvedabilitytobudget
• Knownfinancialcostofthehedgepriortoexecution–youcannotlose
moreonanoptionthantheamountyoupayforit
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>The Financial profit achieved by hedging has compensated for the increased price of iron ore in the physical market, which means you have
realized your fixed price for Iron Ore of $140/mt. If you had not hedged you would have incurred a real loss of $30/mt for purchasing the
required Iron Ore.
It is now June and the price for iron ore has fallen to $120mt
Hedging ScenarioIron Ore, CFR North China (TIO, PIO)
A steel mill purchasing manager that produces HRC for an automotive client is concerned the price of its main input, Iron Ore, will rise dramatically over the next 12 months
• ItisNovember–Thesteelmillisinnegotiationstosecure500,000mt/monthofIronOreforthenext12months,theamountitneedstoproduce
HRCforitsautomotiveclient.
• ThemillisconfidentofsecuringIronOrevolume,however,duetothedemiseoftheannualbenchmarkpricingmechanism,afixedpriceisno
longeravailable.
• ThemillcontractstopurchasethevolumeofIronOrerequiredandagreestolinkthepricetoaleadingpublishedindexaslistedonCMEGroup.
• ThemillisconcernedthatthepriceofIronOremightrisedramaticallyoverthecomingyearanditmightnotbeabletoincreasetheHRCpriceby
thesameamount,asincreasedcompetitioniskeepingthepriceofHRCfromrising.
• ThemilldecidesitwouldliketofixitscostofIronOrebyhedgingontheCMEGroup.
• Themillcontactsitsbrokerwhooffersafixedpriceof$140mtpermonthfortheentirevolumeovertheyearbeginninginJanuary.Thehedgeisto
belinkedtothesameleadingindexasthephysicalpriceforIronOre.
• Themillaccepts,secureintheknowledgethatatthispriceitwillbeabletosupplyHRCtoitscustomerataprofit.
It is now January and the price for iron ore has risen to $170mt
The Virtual steel Mill: Hedging Along the supply Chain
Financial
Bought500,000mtofJanuaryIronOreswapfuturesthroughCME
ClearPortat$140/mt
SellCMEJanuaryIronOreswapfuturespositionatthenew
priceof$170/mt
Financial profit or loss: $170 - $140= $30/mt
Financial
Bought500,000mtofIronOreswapfuturesontheCMEat$140/mt
SellCMEIronOreswapfuturespositionatthenewpriceof$120/mt
Financial profit or loss: $120 - $140= ($20/mt )
Physical
Purchase500,000mtofIronOreatmarketpriceof$170/mtfor
Januarydelivery
Physicalmarketpricehasalsorisento$170/mt,therefore,itismore
expensivetopurchasetheIronOrerequiredtomakesteel.
Physical “Profit” or “Loss” = $30/mt
Physical
Purchase500,000mtofIronOreinthephysicalmarketat$120mt
Physicalmarketpricehasfallento$120mt,therefore,itisless
expensivetopurchasetheIronOrerequiredtomakesteel.
Physical “Profit” or “Loss” = $20/mt
>The Financial loss incurred by hedging has been compensated for by the cheaper physical price for iron ore–meaning you have achieved the
$140/mt price for iron ore you wanted at the outset.
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
Benefits of Hedging:
• Protectyourselfagainstpricevolatility
• Lock-inprofitmarginsandprotectagainstanyadverseprice
movements
• Improvedabilitytobudget
• Guaranteecashflow
• Benefitfromlowercostoffinancingasyouhaveafullyhedgedposition
• Securelong-termclientbusiness
• Hedgingoffersyouacompetitiveadvantage
• Collateralizeinventory
• Improvecreditrating
Product Exchange Code Reuters Code Bloomberg Code
IronOre62%Fe,CFRNorthChina(Platts)SwapFutures
PIO <0#PIO:> ICPA
IronOre62%Fe,CFRNorthChina(Platts)SwapOptions
ICP <0#ICP+> PIOZ1
IronOre62%Fe,CFRChina(TSI)SwapFutures
TIO <0#TIO:> ICTA
IronOre62%Fe,CFRChina(TSI)SwapOptions
ICT <0#ICT+> TIOZ1
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Hedging ScenarioCoking Coal, FOB Australia (ACR) (ALW) (ACL)
The purchasing manager of a steel mill that produces HRC for an automotive client is concerned the price of a key input cost, Coking Coal, will rise dramatically over the next 12 months
• ItisNovember–Asteelmillpurchasingmanagerisinnegotiationstosecure100,000mt/monthofCokingCoalforthenext12months,the
amountitneedstoproduceHRCforitsautomotiveclient.
• ThemillisconfidentofsecuringCokingCoalvolume,however,duetoincreasingdemandforthisproductthesupplierwillonlyagreetosellona
monthlyaveragepricebasis.
• ThemillcontractstopurchasethevolumeofCokingCoalrequiredandagreestolinkthepricetoaleadingpublishedindexaslistedonCME
Group.
• ThemillisconcernedthatthepriceofCokingCoalmightrisedramaticallyoverthecomingyearanditwillbeforcedtopaythispricetosecure
supply.
• Themill’spurchasingmanagerdecidesitwouldliketofixitscostofCokingCoalbyhedgingthroughCMEGroup.
• Themillcontactsitsbrokerwhooffersafixedpriceof$240mtpermonthfortheentirevolumeovertheyearbeginninginJanuary.Thehedgeisto
belinkedtothesameleadingindexasthephysicalpriceforCokingCoalagreed.
It is now January and the price for Coking Coal has risen to $280mt
The Virtual steel Mill: Hedging Along the supply Chain
Financial
Bought100,000mtofJanuaryCokingCoalswapfuturesthrough
CMEClearPortat$240/mt
SellCMEJanuaryCokingCoalswapfuturespositionatthenewprice
of$280/mt
Financial profit or loss: $280 - $240= $40/mt
Financial
Bought100,000mtofcokingcoalSwapFuturesonthe
CMEat$240/mt
SellCMEcokingcoalSwapFuturespositionatthenewpriceof$220/mt
Financial profit or loss: $220 - $240= ($20/mt)
Physical
Purchase100,000mtofCokingCoalatunknownfuturepricefor
Januarydelivery
Physicalmarketpricehasalsorisento$280/mt,therefore,itismore
expensivetopurchasetheCokingCoalrequiredtomakesteel.
Physical “Profit” or “Loss” = $240 - $280= ($40/mt)
Physical
Purchase100,000mtofcokingcoalinthephysicalmarketat$220mt
Physicalmarketpricehasfallento$220mt,therefore,itisless
expensivetopurchasethecokingcoalrequiredtomakesteel.
Physical “Profit” or “Loss” = $20/mt
>The Financial loss incurred by hedging has been compensated for by the cheaper physical price for coking coal meaning you have achieved
the $240/mt price for coking coal you wanted at the outset.
>The Financial profit achieved by hedging has compensated for the “loss” of profit on the physical side which means you have realized your fixed
price for coking coal of $240/mt. If you had not hedged you would have incurred a real loss of $40/mt for purchasing the required coking coal.
It is now June and the price for Coking Coal has fallen to $220mt
Benefits of Hedging:
• Protectyourselfagainstpricevolatility
• Lock-inprofitmarginsandprotectagainstanyadverseprice
movements
• Improvedabilitytobudget
• Guaranteecashflow
• Benefitfromlowercostoffinancingasyouhaveafullyhedgedposition
• Securelong-termclientbusiness
• Hedgingoffersyouacompetitiveadvantage
• Collateralizeinventory
• Improvecreditrating
Product Exchange Code Reuters Code Bloomberg Code
AustralianCokingCoal(Argus)LowVolSwapFutures
ACR <0#ACR:> ACRZ1
AustralianCokingCoal(Platts)LowVolSwapFutures
ALW <0#ALW:> ALWZ1
AustralianCokingCoal(Platts)SwapFutures
ACL <0#ALC:> ACLZ1
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
new yOrk
[email protected]+12122992358
CHICAGO
[email protected]+13124664637
LOndOn
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[email protected]+(44)2033793720
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Hedging ScenarioBillet, FOB Black Sea (SSF)
Billet producer selling forward on a fixed price basis to secure a contract while locking in profit margin
• ItisNovember–Abilletproducerhasaclientwhowouldliketobuy10,000mtofbilletpermonthfortwelvemonthsbeginninginJanuary.
• Tosecurethedealthebilletproducermustagreetosupplybilletonafixedpricebasis.
• Itcoststhebilletproducer$550mttoproducebillet.
• ThecurrentpriceforacalendarBilletswapis$600mtwhichwouldprovidea$50mtprofit.
• Boththebilletproducerandtheclientarehappytoagreeacontracttobuyandsell10,000mtpermonthofbilletatafixedpriceof$600mtas
referencedonCMEClearPort.
• Thebilletproducerisconcernedthatanadversepricemovementmightaffectitsforecasted$50mtprofitmargin.Theproducerdecidestolockin
thisprofitmarginbyhedgingthroughCMEGroup.
• Thebilletproducercontactsitsbrokerandagreestobuy20CMEBilletswapcontractspermonthatafixedpriceof$600mtbasistheCMEGroup
SteelBillet,FOBBlackSea(Platts)swapfutures.(Note:eachCMEGroupBilletswapcontract=100mt)
It is now January and the price for billet has risen to $700mt
>The Financial profit achieved by hedging has compensated for the “loss” of profit on the physical side which means you have secured your
$50mt premium which is what you wanted to protect at the outset.
It is now June and the price for billet has fallen to $500mt
>The Financial loss incurred by hedging has been compensated for by the physical profit which means you have secured your $50mt premium
which is the outcome you wanted at the outset.
The Virtual steel Mill: Hedging Along the supply Chain
Financial
Bought20lotsofJanuaryBilletswapfuturesontheCMEat$600/mt
SellCMEJanuaryBilletswapfuturespositionatthenewprice
of$700/mt
Financial profit or loss: $700 - $600 = $100/mt
Financial
Bought20lotsofBilletswapfuturesthroughCMEClearPort
at$600/mt
SellBilletswapfuturespositionatthenewpriceof$500/mt
Financial profit or loss: $500 - $600 = ($100/mt)
Physical
Sold20lotsofBillettocustomerat$600/mtforJanuarydelivery
Physicalmarketpricehasalsorisento$700/mt,therefore,hadyou
notagreedafixedpriceyoucouldhavesoldbilletatthenewprice.
Physical “Profit” or “Loss” = $100/mt
Physical
Sold20lotsofBillettocustomerat$600/mt
Physicalmarketpricehasalsofallento$500/mt,therefore,hadyou
notagreedafixedpriceyoucouldhavesoldbilletatthenewprice.
Physical “Profit” or “Loss” = $100/mt
Benefits of Hedging:
• Protectyourselfagainstpricevolatility
• Lock-inprofitmarginsandprotectagainstanyadverseprice
movements
• Improvedabilitytobudget
• Guaranteecashflow
• Benefitfromlowercostoffinancingasyouhaveafullyhedgedposition
• Securelong-termclientbusiness
• Hedgingoffersyouacompetitiveadvantage
• Collateralizeinventory
• Improvecreditrating
Product Exchange Code Reuters Code Bloomberg Code
SteelBillet,FOBBlackSea(Platts)SwapFutures
SSF <0#SSF:> SBPA
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
new yOrk
[email protected]+12122992358
CHICAGO
[email protected]+13124664637
LOndOn
[email protected]+(44)2033793791
[email protected]+(44)2033793720
sInGApOre
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[email protected]+6565935586
Hedging ScenarioHMS Scrap, CFR Turkey (FSF)
A steel mill purchasing scrap on a fixed price basis to protect against a rising Scrap price.
• ItisNovember–ATurkishsteelmillisconcernedthatthepriceofScrapwillriseinthecomingmonthsresultinginincreasedproductioncosts.
Themill,whichproducesHRC,isconcernedthatitmaynotbeabletopassalonganyriseinthepriceofScraptoitsclientsduetoincreased
competitionintheHRCmarket.
• Themillcontactsitsbrokerandasksforapricequotetohedge10,000mtpermonthofCMEGroupHMS80/20Scrap,CFRTurkeyswapfutures.
• Thebrokerquotesapriceof$400/mtpermonth.
• TheTurkishsteelmilldecidestolockinhispriceofScrapatthispriceforatwelvemonthperiodbyhedgingthroughCMEClearPort.
• TheSteelmillanditsscrapsupplieragreetobuy/sellscrapreferencetheCMEGroupmonthlyaverageHMS80/20FerrousScrap,CFRTurkey
(Platts)swapfutures.
It is now January and the price for scrap has risen to $450mt
> The Financial profit achieved by hedging on the CME Group has compensated for the additional cost of physical scrap. The Steel mill has
been able to protect itself from the adverse impact of a rise in the price of Scrap which was the intended outcome at the outset.
It is now June and the price for billet has fallen to $350mt
>The Financial loss incurred by hedging has been compensated for on the physical side as the price for scrap has also fallen by $50/mt. The
mill has therefore achieved the outcome intended in November when the hedge was purchased.
Note: it is essential that the steel mills physical contract is linked to the CME Group’s contract; HMS 80/20 Ferrous Scrap, CFR Turkey (Platts) Swap
Futures. Linking a physical and a financial contract to different indices and products may not lead to the desired outcome as price variations can occur
between reported prices and differing scrap varieties.
The Virtual steel Mill: Hedging Along the supply Chain
Financial
Bought200ofJanuaryHMSScrapswapfuturesontheCME
at$400/mt
SellCMEJanuaryHMSScrapswapfuturespositionatthenewprice
of$450/mt
Financial profit or loss: $450 - $400 = $50/mt
Physical
Bought200ofHMSScrapattheJanuarymarketpriceof$450/mt
Thesteelmillhadbudgetedforascrappriceof$400/mt.Thephysical
pricehoweverhasrisento$450/mt.
Thishasresultedinanadditionalscrapcostof$50/mtwhichthe
millmaynotbeabletorecoupfromclientsduetoincreasedHRC
competition.
Physical “Profit” or “Loss” = $50/mt
Financial
Bought200ofHMSScrapswapfuturesthroughCMEClearPortat
$400/mt
SellBilletswapfuturespositionatthenewpriceof$350/mt
Financial profit or loss: $350 - $400 = ($50/mt)
Physical
Bought200ofHMSScrapatthemarketpriceof$350/mt
ThesteelmillhadbudgetedforaScrappriceof$400/mt.The
physicalprice,however,hasfallento$350/mt.
Physical “Profit” or “Loss” = $50/mt
Benefits of Hedging:
• Protectyourselfagainstpricevolatility
• Lock-inprofitmarginsandprotectagainstanyadverseprice
movements
• Improvedabilitytobudget
• Guaranteecashflow
• Benefitfromlowercostoffinancingasyouhaveafullyhedgedposition
• Securelong-termclientbusiness
• Hedgingoffersyouacompetitiveadvantage
• Collateralizeinventory
• Improvecreditrating
Product Exchange Code Reuters Code Bloomberg Code
HMS80/20FerrousScrap,CFRTurkey(Platts)swapfutures
FSF <0#FSF:> FSAA
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
new yOrk
[email protected]+12122992358
CHICAGO
[email protected]+13124664637
LOndOn
[email protected]+(44)2033793791
[email protected]+(44)2033793720
sInGApOre
[email protected]+6565935564
[email protected]+6565935586
Hedging ScenarioEuropean HRC, Ex-Works Ruhr Germany (NFS)
A German steel mill selling forward on a fixed price basis to secure a contract while locking in profit margin
• ItisNovember–AGermansteelmillhasanautomotiveclientwhowouldliketobuy100,000mtofHRCpermonthfortwelvemonths
beginninginJanuary.
• TosecurethedealthesteelmillmustagreetosupplyHRConafixedpricebasis.
• Itcoststhesteelmill€450mttoproduceHRC.
• ThecurrentpriceforHRCreferencedontheCMEGroupis€500mtwhichwouldprovidea€50mtprofit.
• Boththesteelmillandtheautomotiveclientarehappytoagreeacontracttobuyandsell100,000mtpermonthofHRCatafixedpriceof
€500mtasreferencedonCMEClearPort.
• Thesteelmillisconcernedthatanadversepricemovementmightadverselyimpactagainsthisforecast€50mtprofitmargin.Thesteelmill
decidestolock-inthisprofitmarginbyhedgingthroughCMEClearPort.
• TheGermansteelmillcontactsitsbrokerandagreestobuy2,000CMEGroupEUHRCswapfuturespermonthatafixedpriceof€500mtbasis
theCMEGroupEuropeanHotRolledCoil,Ex-WorksRuhrGermany(Platts)swapfutures.
It is now January and the price for European HRC has risen to €600mt
>The Financial profit achieved by hedging has compensated for the “loss” of profit on the physical side which means you have secured your
€50mt premium–which is what you wanted to protect at the outset.
It is now June and the price for European HRC has fallen to €450mt
>The Financial loss incurred by hedging has been compensated for by the physical profit which means you have secured your €50mt premium
which is the outcome you wanted at the outset.
The Virtual steel Mill: Hedging Along the supply Chain
Financial
Bought2,000ofJanuaryHRCswapfuturesthroughCMEClearPort
at€500/mt
SellCMEJanuaryHRCswapfuturespositionatthenewpriceof
€600/mt
Financial profit or loss: €500 - €600 = €100/mt
Financial
Bought2,000ofJuneHRCswapfuturesontheCMEat€500/mt
SellCMEJuneHRCswapfuturespositionatthenewpriceof€450/mt
Financial profit or loss: €450 - €500 = (€50/mt)
Physical
Sold2,000ofHRCtocustomerat€500/mtforJanuarydelivery
PhysicalmarketpriceforHRChasalsorisento€600/mt,hadyou
notagreedafixedpriceyoucouldhavesoldEuropeanHRCatthenew
price.
Physical “Profit” or “Loss” = €100/mt
Physical
Sold2,000ofHRCtocustomerat€500/mt
Thephysicalmarketpricehasalsofallento€450/mt.Therefore,had
younotagreedafixedpriceyoucouldhavesoldEuropeanHRCatthe
newprice.
Physical “Profit” or “Loss” = €50/mt
Benefits of Hedging:
• Protectyourselfagainstpricevolatility
• Lock-inprofitmarginsandprotectagainstanyadverseprice
movements
• Improvedabilitytobudget
• Guaranteecashflow
• Benefitfromlowercostoffinancingasyouhaveafullyhedgedposition
• Securelong-termclientbusiness
• Hedgingoffersyouacompetitiveadvantage
• Collateralizeinventory
• Improvecreditrating
Product Exchange Code Reuters Code Bloomberg Code
EuropeanHotRolledCoil,Ex-WorksRuhrGermany(Platts)swapfutures
NSF <0#NSF:> MSEZ1
U.S.MidwestDomesticHot-RolledCoilSteelIndexfutures
HR <0#HRE:> HRCZ1
U.S.MidwestDomesticHot-RolledCoilSteelIndexAveragePriceoptions
HRO <0#HRO+> ACLZ1
Forfurtherinformationonourslateofferrousproducts,pleasevisitcmegroup.com/ferrousorcontactoneofthefollowingExchangerepresentatives:
new yOrk
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CHICAGO
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LOndOn
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[email protected]+(44)2033793720
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[email protected]+6565935586
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AllmatterspertainingtorulesandspecificationshereinaremadesubjecttoandaresupersededbyofficialCME,CBOTandNYMEXrules.Currentrulesshouldbeconsultedinallcasesconcerningcontractspecifications.
Platts®isatrademarkofTheMcGraw-Hillcompanies,Inc.andhasbeenlicensedforusebytheNewYorkMercantileExchange.Plattsdoesnotsponsor,endorse,sellorpromotethecontractsreferencedhereinandPlattsmakesnorecommendationsconcerningtheadvisabilityofinvestinginthecontracts.
FUTURES:Futurestradingisnotsuitableforallinvestors,andinvolvestheriskofloss.Futuresarealeveragedinvestment,andbecauseonlyapercentageofacontract’svalueisrequiredtotrade,itispossibletolosemorethantheamountofmoneydepositedforafuturesposition.Therefore,tradersshouldonlyusefundsthattheycanaffordtolosewithoutaffectingtheirlifestyles.Andonlyaportionofthosefundsshouldbedevotedtoanyonetradebecausetheycannotexpecttoprofitoneverytrade.Allexamplesinthisbrochurearehypotheticalsituations,usedforexplanationpurposesonly,andshouldnotbeconsideredinvestmentadviceortheresultsofactualmarketexperience.
SWAPS:Swapstradingisnotsuitableforallinvestors,involvestheriskoflossandshouldonlybeundertakenbyinvestorswhoareeligiblecontractparticipants(ECPs)withinthemeaningofsection1(a)18oftheCommodityExchangeAct.Swapsarealeveragedinvestment,andbecauseonlyapercentageofacontract’svalueisrequiredtotrade,itispossibletolosemorethantheamountofmoneydepositedforaswapsposition.Therefore,tradersshouldonlyusefundsthattheycanaffordtolosewithoutaffectingtheirlifestyles.Andonlya
portionofthosefundsshouldbedevotedtoanyonetradebecausetheycannotexpecttoprofitoneverytrade.
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