Corporate Risk Mngmnt-commodity Hedging

30
How to Manage Your Commodity Risk ?? An Eyeopener.

description

an intro to hedging in commodities ( cotton and copper)

Transcript of Corporate Risk Mngmnt-commodity Hedging

Page 1: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 2: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 3: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 4: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 5: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 6: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 7: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 8: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 9: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 10: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 11: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 12: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 13: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 14: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 15: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 16: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 17: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 18: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 19: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 20: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 21: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 22: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 23: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 24: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 25: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 26: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 27: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 28: Corporate Risk Mngmnt-commodity Hedging

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

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 29: Corporate Risk Mngmnt-commodity Hedging

Porterrsquos Model-Copper Industry

THANK YOU

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU
Page 30: Corporate Risk Mngmnt-commodity Hedging

THANK YOU

  • How to Manage Your Commodity Risk
  • TYPES OF CORPORATE RISKS FACED
  • COMMODITY RISK
  • Slide 4
  • Slide 5
  • Slide 6
  • Slide 7
  • HEDGE RATIO
  • TYPES OF HEDGES
  • TYPES OF HEDGES (cont)
  • Slide 11
  • Slide 12
  • Slide 13
  • Fundamentals
  • Commodities that can be Hedged
  • COTTON
  • Slide 17
  • Slide 18
  • Slide 19
  • Slide 20
  • Slide 21
  • SMC global Your helper your Guide
  • MCX- your options
  • NCDEX your options
  • COPPER INDUSRY
  • INDIAN CONTEXT
  • HEDGING - Reasons
  • HEDGING-Reasons(Cont)
  • Porterrsquos Model-Copper Industry
  • THANK YOU