Price Risk - Hedging. CPO & Cotton. 1

Transcription

1 Price Risk - Hedging CPO & Cotton 1

2 Lakh MT CPO: Rising Indian Import 100 India Import / / / / /15 2

3 Lakh MT Growing Market share Domestic market for CPO has not only grown year after year in absolute terms but also in terms of market share. Current market share of Palm Oil is approx 45% Market Share 2010/ / / / /15 Oil, Palm Oil, Soybean Oil, Rapeseed Oil, Cottonseed Oil, Peanut Oil, Sunflowerseed Other 3

4 Price Risk Nov 12 -Oct 13 Nov 13 -Oct 14 Nov 14 -Oct 15 High Low Std Dev Mean Price Risk / 10MT 36,613 46,748 24,779 Risk / 500 MT (App) 18 Lakh 23 Lakh 12 Lakh Worse case /10 MT 1,66,500 1,88,500 1,19,300 Risk / 500 MT (App) 83 Lakh 94 Lakh 60 Lakh 4

5 Price Correlation There are too many factors to understand and control e.g. Weather, Area, Production, Import, Export, Local Demand, FOREX, government policies of India and abroad. Too many commodities and other financial instruments affect each other. Price Correlation CPO Kandla BMD CPO 0.81 CBOT Soy Oil 0.32 Indore Soy Oil 0.60 Crude Oil 0.69 It is virtually impossible to control so many variable and remain unhurt all the time. 5

6 CPO Contract (Important Features): Quotation Trading Unit Daily Price Limit Price Quote Rs/10 Kg 10 MT Initial Margin 5% DDR Delivery Unit Maximum Allowable Open Position Near Month Maximum Allowable Open Position 4% (Detail circular no. MCX/T&S/004/2015) Ex-Kandla (Exclusive of sales tax) Simple average of last 3-days spot price 10 MT Clientwise: Higher of MT or 5% OI Memberwise: Higher of MT or 20% OI Clientwise: Higher of MT or 5% OI Memberwise: Higher of MT or 20% OI 6

7 CPO Spot vs Future 650 SPOT vs Futures /2/2014 4/2/2014 7/2/ /2/2014 1/2/2015 4/2/2015 CPO 2nd Month CPO Spot Correlation: 98.7% 7

8 BMD MCX CPO Correlation 3500 BMD Malaysia* vs MCX CPO /2/2014 4/2/2014 7/2/ /2/2014 1/2/2015 4/2/ BMD 3rd Month CPO 2nd Month Correlation: 94.6% *BMD in INR 8

9 Short Hedge Physical Transaction Future Transaction 21 st Jul, 2015 Buy 100 MT Palm Sell 100 MT Palm 25 th Aug, 2015 Sell 100 MT Palm Buy 100 MT Palm Profit/Loss (-) 5,00,000 (+) 5,00,000 9

10 WHY MCX Cotton contract Contract designed and regularly monitored by panel of esteemed national and regional advisory committee. Deliverable range: 27mm to 31mm with 29mm as the base grade Delivery centers: Rajkot (Base), Kadi, Yavatmal, Jalna, Jalgaon, Sirsa, Bhatinda, Beawar, Raichur and Guntur High correlation with prices at benchmark international exchanges (~86%) 10

11 Need for Futures Trading Risk management for all ecosystem participants Annualized Avg. Volatility in Spot Price is around 27% Risk borne for holding 100 bales is Rs. 4,26,600. Efficient price discovery mechanism Convergence of financial and commodity market participants Represent national price discovery which get widely disseminated 11

12 Cotton Contract (Important Features): Quotation Trading Unit Rs/Bale 25 Bales Daily Price Limit 3+1% Price Quote DDR Delivery Unit Maximum Allowable Open Position Near Month Maximum Allowable Open Position Delivery Logic Ex-Rajkot (Exclusive of sales tax) Simple average of last 3-days spot price 100 Bales Clientwise: Higher of 1,50,000 Bales and 5% of market OI Memberwise: Higher of 15,00,000 MT and 20% OI Clientwise: Higher of 75,000 MT and 5% and market OI Memberwise: Higher of 7,50,000 MT or 20% and market OI Compulsory Delivery 12

13 Delivery Quality Certification Charges: Rs 2500/- per sample lot of 100 Bales (Taxes Extra) Warehouse Storage Charges: Rs1.25/- to Rs1.35 per bale per day (Taxes Extra) Base center: Rajkot Additional Delivery Centres: Yavatmal, Jalna, Jalgaon, Kadi, Bhatinda, Sirsa, Beawar, Guntur, Raichur 13

14 HEDGING ILLUSTRATIONS (FALLING PRICES) Example 1: Assume a ginner is holding stocks of 1,000 bales of cotton (29mm) in July By hedging, he can lock in a price for his stock in November and protect himself against the possibility of falling prices. Assume the spot price of cotton (29 mm) in July 2015 is Rs 16,000 a bale and the price of MCX November 2015 contract is Rs. 17,000 a bale. 14

15 SHORT HEDGING (SELLING ON MCX) Time Cash/spot Futures July 2015 Spot market at Rs 16,000 a bale Sells 40 lots (of each 25 bales contract) of MCX November 2015 at Rs. 17,000 a bale November 2015 Sells 1000 bales of cotton at Rs. 15,000 a bale Buys 40 lots of MCX November 2015 at Rs. 16,000 a bale Result Loss of Rs per bale Gained Rs per bale Thus, the ginner protected himself from the falling prices with an effective selling price of Rs. 16,000 a bale (No Profit/No loss). 15

16 HEDGING ILLUSTRATIONS (RISING PRICES) Example 2: (rising prices): Assume in July 2015 an exporter received an order to export 1,000 bales of cotton in November He is planning to buy cotton from the cash market and export it in November. The price in July is Rs. 16,000 a bale and he is worried that prices would rise by November. By hedging, he can lock in the purchase price in July itself for November delivery and protect himself from rise in prices in cash market. 16

17 LONG HEDGING (BUYING ON MCX) Time Cash Futures July 2015 Spot market at Rs 16,000 a bale Buys 40 lots (of each 25 bales contract) of MCX November 2015 at Rs. 17,000 a bale November 2015 Buys 1,000 bales of cotton at Rs. 17,000 a bale Sells 40 lots of MCX November 2015 at Rs. 16,000 a bale Result Loss of Rs a bale Gain of Rs a bale Thus, exporter hedged himself from the rising prices in the cash market with an effective buying price of Rs. 16,000 (i.e. 1, ) a bale. 17

18 D I S C L A I M E R Certain statements in this presentation contain forward-looking information about Multi Commodity Exchange of India Limited and its subsidiary companies, including their business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or concern future financial performance (including revenues, earnings or growth rates), possible future plans and action of the company. Forward-looking statements are based on current expectations and understanding about future events. They are inherently subject to, risks, uncertainties, and assumptions, etc. about the Company, economic factors and the industry in general. The Company s actual performance and events could materially differ from those expressed or implied by forward-looking statements made by the company due to, but not limited to, important factors such as general economic, political and market factors in India and internationally, competition, technological change, and changes in the government regulations. The material mentioned in this presentation is general background information about the Company s activities current at the date of the presentation. It is information given in summary form and does not purport to be complete, is subject to change without notice and its accuracy is not guaranteed. This presentation (including any information contained herein and any information, whether or not in writing, supplied in connection herewith) is strictly confidential. 18

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