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How to Manage Your Commodity Risk
An Eyeopener
TYPES OF CORPORATE RISKS FACED
1 Business risksa) Commodity Risk
bull Price risk price fluctuationsbull Quantitative natural calamity weather etc
b) Concentration Risk
c) International operations Risk
2 Financial Risksa) Credit Risk
b) For-ex Risk
3 Operational Risks
COMMODITY RISK
bull Reasonsndash Change in inventory valuendash Inflation leading to
bull Increase in production-infrastructure costbull Increase in production-Raw material cost
ndash Change in Selling price-Price Fluctuations
COMMODITY RISK
Reasons fluctuations
COMMODITY RISK
bull Countering the risk-Hedgingndash Commodity futures (selling price)
bull OTCbull Local exchangesbull International exchanges
ndash Inventory hedging (Cost price)ndash Optionsndash Swapsndash Borrowing linked to commodity prices
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF CORPORATE RISKS FACED
1 Business risksa) Commodity Risk
bull Price risk price fluctuationsbull Quantitative natural calamity weather etc
b) Concentration Risk
c) International operations Risk
2 Financial Risksa) Credit Risk
b) For-ex Risk
3 Operational Risks
COMMODITY RISK
bull Reasonsndash Change in inventory valuendash Inflation leading to
bull Increase in production-infrastructure costbull Increase in production-Raw material cost
ndash Change in Selling price-Price Fluctuations
COMMODITY RISK
Reasons fluctuations
COMMODITY RISK
bull Countering the risk-Hedgingndash Commodity futures (selling price)
bull OTCbull Local exchangesbull International exchanges
ndash Inventory hedging (Cost price)ndash Optionsndash Swapsndash Borrowing linked to commodity prices
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COMMODITY RISK
bull Reasonsndash Change in inventory valuendash Inflation leading to
bull Increase in production-infrastructure costbull Increase in production-Raw material cost
ndash Change in Selling price-Price Fluctuations
COMMODITY RISK
Reasons fluctuations
COMMODITY RISK
bull Countering the risk-Hedgingndash Commodity futures (selling price)
bull OTCbull Local exchangesbull International exchanges
ndash Inventory hedging (Cost price)ndash Optionsndash Swapsndash Borrowing linked to commodity prices
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COMMODITY RISK
Reasons fluctuations
COMMODITY RISK
bull Countering the risk-Hedgingndash Commodity futures (selling price)
bull OTCbull Local exchangesbull International exchanges
ndash Inventory hedging (Cost price)ndash Optionsndash Swapsndash Borrowing linked to commodity prices
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COMMODITY RISK
bull Countering the risk-Hedgingndash Commodity futures (selling price)
bull OTCbull Local exchangesbull International exchanges
ndash Inventory hedging (Cost price)ndash Optionsndash Swapsndash Borrowing linked to commodity prices
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COMMODITY RISK
bull Hedging By Futures contracts in India
bull Definitionndash Making an investment to reduce the risk of adverse
price movements in an asset Normally a hedge consists of taking an offsetting position in a related security such as a futures contract
ndash Investors use this strategy when they are unsure of what the market will do A perfect hedge reduces your risk to nothing (except for the cost of the hedge)
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
EXAMPLE OF A HEDGEPrediction A Farmer predicts Price will go down from Rs 62kg (spot price-Oct) to Rs 55kg (spot price-Dec) bullHence the Farmer Sells a December 20th Futures contract at Rs 62kg
COMMODITY RISK
Spot 1st Dec
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
HEDGE RATIO
bull Definitionndash A ratio comparing the value of a position protected via a hedge
with the size of the entire position itself A ratio comparing the value of futures contracts purchased or sold to the value of the cash commodity being hedged
bull Examplendash Say a textile manufacturer is to receive delivery of 425 quintals
of Raw cotton after three months If he buys three 3 months futures contract covering 255 quintals of cotton then his hedge ratio is 35 he is protected 60 of his exposure
ndash The hedge ratio is important for investors in futures contracts as it will help to identify and minimize basis risk
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF HEDGESbull Long Hedge
bull This requires taking a long position in the futures contractbull Appropriate when a certain asset or commodity would be
purchased in the future and one is interested in locking in the price now
bull Textile Company would use a long hedge
bull Short Hedgebull This involves a short position in the futures contractbull Applicable when a hedger already owns an asset and
expects to sell it in the futurebull The Aluminum producer would use a short hedge
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF HEDGES (cont)
bull Cross Hedgendash Cross Hedge is used to hedge price risk of
different but economically related commodities
bull 1048698Correlation analysis is used
ndash Hedging and cross hedging should only be attempted if the price movements are similar and basis risk is acceptable to the hedger
bull Example Aviation turbine fuel- crude oil
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF HEDGES (cont)
bull Unbalanced hedgendash Description The future contract standardized size
units do not match the cash position quantityndash Solution A combination of regular size futures and
mini contracts can be used to reach a futures position as close as possible to the cash position
ndash Variationsbull Over hedge occurs when futures quantity exceeds the cash
quantitybull Under hedge occurs when the cash position exceeds the
future quantity
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF HEDGES (cont)
bull Inter-commodity spreadndash Price movements between related underlying
instruments tend to correlate fairly well and such gains in one derivatives position may offset losses in a related instrument
ndash 1048698Companies can hedge their input and output price risk
bull 1048698Soya oil manufacturers--Soybean and Soya oilbull 1048698RefinersmdashCrude and gasoline
ndash 1048698Crack Spread
ndash 1048698Exchanges offer an inter-commodity spread discount on initial margin
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
TYPES OF HEDGES (cont)
bull Intra commodity spreadndash Bull long near end contract short far end
contractndash Bear short near end contract long far end
contract
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
Fundamentals
bull Difference between spot and future price depends (fundamentally) uponndash Storage characteristics of the commodityndash Supplies of the commodityndash Production and consumption cycle for the commodityndash Ease of short selling the commodity ndash Transaction costs
bull (Good storability) +(Prodgtconsumption)= price moves according to cash and carry model
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
Commodities that can be Hedged
bull Two examplesndash Cottonndash Copper
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Why Hedge STATS speak for themselvesndash 2008-09 Global predictions
bull Production 158172 Mn Bales (up 3)bull Use 1617 Mn Bales (up 1)
ndash India bull 07-08 31 Mn Bales (up 11)
ndash Chinabull Production expected to increase + decreased import duties=
increased demand hence market share of China downndash US
bull Area under cultivation expected to decrease= market share of the US down Imports up
bull Cotton prices have been defying fundamental measures of supply and use
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Stages for Hedgingndash Raw Cotton Hedge against increase in Price
bull Farmerbull Yarn producerbull Textile producer
ndash Cotton Yarn bull Buyer Hedge against Price risebull Seller Hedge against Price fall
ndash Textilebull Buyer (Garment manufacturer) Price Risebull Seller
ndash Domestic seller Price Fallndash Exporter Price Fall and For-Ex Risk
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Steps1 Identity Risk2 Quantify Risk3 Calculate Possible and optimum Hedge Ratio4 Hedge options available
1 Simple hedge 1 Long- short2 Short- long3 intra commodity calendar Hedge spread (safer)
2 Cross Hedge If contract not available for the type3 Inter commodity spread4 Inter Exchange spread
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Tax Benefit and provisionsndash Refer to
httpwwwtaxmanncomDitTaxmannIncomeTaxActs2006ITActcasesec43(5)htm
ndash Hedging profitsincome if any treated as business income different from speculative income
ndash Hedging loss is treated as business loss and not speculative loss
ndash Hedging contracts can be both for purchase and salendash In order to be a genuine and valid hedging contract of sale the
total of such transactions should not exceed the total stock of the raw material or merchandise in hand
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Tax Benefit and provisions (continued)ndash In order to be genuine and valid hedging contract of
purchase there should be an existing forward contract of sale by actual delivery
ndash The hedging contracts need not necessarily be in the same variety of the commodity they can be in connected commodities eg one type of cotton against another type of cotton
ndash Forwards allowed whenbull commodity not traded on exchangebull No traded commodity correlated to intended commodity
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COTTON
bull Margin causes leverage
bull Cautionndash Leverage Because of Margin depositndash Tick Size ndash Price limits during last month
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
SMC global Your helper your Guide
bull Member of NCDEX and MCXbull ISO 90012000 certified DP for
commoditiesbull Proactive and timely world class research
based advice and guidancebull Investor meetseminars across Indiabull Brokerage Negotiable based on turnoverbull Service offlineonlinesoftware based (real
time screen)
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
MCX- your options
bull You can hedge inndash Cotton L staplendash Cotton M staplendash Cotton S staplendash Cotton yarnndash Kapas
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
NCDEX your options
bull You can hedge inndash Indian 285 mm cottonndash Indian 30 mm cottonndash Shankar kapas
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
COPPER INDUSRY
bull Global Production1829 mn tonnes Consumption 18 mn tonnesbull Major players in India - Hindalco Industries Ltd - Sterlite Industries Ltd - Hindustan Copper Ltd Other than these corsquos around 1000
secondary producers exist in the market
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
INDIAN CONTEXT
bull Contribution to world Production is low around 35 ndash 4Annual Production around 650000 MT
bull Major Consumers Telecommunication Power CablesWiresConstructionTransportationConsumer DurableDefense
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
HEDGING - Reasons
bull Price fluctuations in International metal exchanges
bull Disturbances in Production copper mines or Refineries
bull Changes in consumptiondemand pattern (ChinaAmerica)
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
HEDGING-Reasons(Cont)
bull Changes in market demand
- Optical Fibers
- Change from fixed line to wireless
bull Disadvantages of secondary producers
- Treatment and refining charges
Porterrsquos Model-Copper Industry
THANK YOU
Porterrsquos Model-Copper Industry
THANK YOU
THANK YOU