Steel Success Strategies XXVI New York June 22 2011 INTL FCStone Inc. www.intlfcstone.com Dr. Mo Ahmadzadeh Senior Vice President, Metals INTL Commodities, Inc. dr.mo@intlfcstone.com
Disclaimer Commodity trading involves risks, and you should fully understand those risks prior to trading. FCStone Group, Inc., INTL FCStone, Inc., and their affiliates assume no liability for the use of any information contained herein. Neither the information, nor any opinion expressed shall be construed as an offer to buy or sell any futures, options on futures contracts, or OTC products. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Any opinions expressed herein are subject to change without notice. Reproduction or use in any format without authorization is forbidden. All rights reserved.
Agenda Steel Futures Reality Check Volume & Open Interest Evolution of Financial Markets & Derivatives Key issues to address in risk management INTL FCStone s approach to risk: IRMP & structured products
LME Steel Billet Volume & OI 3,000 2,500 2,000 1,500 1,000 LHS Volume (lots) RHS Open Interest (lots) 3,500 3,000 2,500 2,000 1,500 1,000 500 500 0 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 0
CME HRC Volume & OI 3,500 LHS Volume (lots) RHS Open Interest (lots) 14,000 3,000 12,000 2,500 10,000 2,000 8,000 1,500 6,000 1,000 4,000 500 2,000 0 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 0
Derivatives market evolution Historical Practice Forward Physicals Futures Contracts Swap Contracts Exchanges Transactions Clearing Physical Futures OTC Derivatives are based on an underlying spot market, often a physical commodity. While spot is for immediate delivery a forward market is the deferral of a spot delivery a contract for specific quality, quantity, time and place of delivery with defined payment terms. Futures are characterized by standardized contract terms on organized exchanges where the clearing house acts as buyer to all sellers and seller to all buyers.
Success factors for futures markets Industry, investor & regulatory support Willing market makers/risk warehousemen Sufficient tonnage and value in physicals trade Fungible basis and flexible logistics Practical delivery mechanism Price volatility Wide range of related hedge products Free market structure Absence of government restrictions No dominant producer / many producers Worldwide demand / many consumers
Hedging vs. Speculation Speculators Starts with no price exposure Takes a market position Assumes a risk Hedgers Starts with price exposure Takes a market position Reduces risk
Risk management overview Identify Risks Recognize and evaluate risk Define physical exposure: long, short or square Develop Strategies, Hedge Goals and Internal Controls To satisfy shareholders, management and lenders To protect margins, cover cash costs and preserve upside potential Monitor & Review Hedging Risks and Effectiveness Physical, hedging and accounting books Watch market liquidity, spreads, opportunities & margins Hedging is a means for removing price risk and protecting future income. It is not intended to be a way of increasing returns.
Risk management practical issues Guidelines Maintain equal but opposite positions in physicals and futures Each purchase is offset by a sale Each sale is offset by a purchase Tracking Multiple physical and futures transactions add complexity Changes in spreads (location, quality and time) add complexity Records Controls Hedge book reports quantity balances only (should be net square) Futures book reports all futures positions, margins and spread valuations Physical book reports all quality, location, price and un-priced contracts Financial book reports all sales, purchases, cash flows and use of capital Internal and external limits Authorizations and audits Counterparty credit and position limits
About INTL FCStone INTL FCStone Inc. (Ticker symbol: INTL) is a Fortune 500 company, providing customers across the globe with execution, clearing and advisory services in commodities, capital markets, currencies, asset management and more... Our Heritage The heritage of INTL FCStone dates back to 1924 when a door-to-door egg wholesaler founded a business called Saul Stone and Company. Through organic growth, acquisitions and the 2009 merger between International Assets Holding Corporation and FCStone Group, we have become a global, Fortune 500 financial services organization. Today, INTL FCStone is relied upon by thousands of companies around the world for our wide array of services many of which are not offered by any other organization of our type and our in-depth industry knowledge and expertise. Our Business INTL FCStone's customers include the producers, processors and end users of virtually every major traded commodity; commercial counter-parties; governmental, non-governmental and charitable organizations; institutional investors; brokers; professional traders; commercial banks; and major investment banks. We offer these customers a comprehensive array of products and services. Among these services are our proprietary Integrated Risk Management Program (IRMP), as well as exchange and OTC execution and clearing services, designed to limit risk and enhance margins and bottomline results; physical trading in base metals, precious metals and grains; a global foreign exchange and currency payment service; asset management; equities market-making; securities execution and trading; and investment banking advisory services.
Integrated Risk Management Program - IRMP IRMP is a retainer-based consulting program that uses a systematic process to evaluate and manage commodity price risk. Our objective is to understand and quantify your commodity risks to make recommendations to manage that risk in order to minimize price and volumetric volatility. The INTL FCStone consultant is accountable for the results of those recommendations, verified through extensive month-end and year-end reports Working with us allows you to have, in effect, your own risk-management department, with access to the latest tools and techniques. In the process, your goals become our goals: protecting your budgets, predicting and stabilizing prices, and securing margins. In short, the IRMP is smart business.
Why Commodity OTC Derivatives? Most importantly: FLEXIBILITY Exchange traded products offer rigid risk management solutions, OTC products offer flexible risk management solutions. Exchange Traded Products OTC Products Exchange traded contracts are generic and are designed specifically to have an appeal to as wide a range of potential contract users worldwide as possible Futures contracts have standard, fixed specifications for quality, quantity, geographic location, tenors, delivery expiry dates etc. OTC swaps allow the negotiation and agreement of all terms and specifications of the contract. Option contracts are limited to simple calls and puts (called vanilla ) on the underlying futures contracts only. OTC options offer a much wider range of protection and payouts than generic vanilla contracts. 13
Metals & Mining Investment Banking & Financial Advisory 1 INTL Provident Group, a division of INTL Trading, Inc., member FINRA/SIPC, provides investment banking advisory and placement services to middle-market corporations, their shareholders and investors across the entire value chain of the metals and mining industries. Trading, Transportation, Logistics Capital Raising Expansion and acquisition financings, recapitalizations Project development and equipment financings Institutional and strategic equity All tranches of term debt, including senior, subordinated, mezzanine and uni-tranche Trade finance Mining / Recycling Production, Smelting, Refining Rolling, Extruding, Alloying, Valueadded Processing Capital Equipment / Engineering First-stage Manufacturing, Fabrication Mergers & Acquisitions Sell and buy-side advisory JV and cross-border advisory Restructuring advisory in-court and outof-court All stages, from early-stage exploration/development to mature production Carbon & Stainless Steels Aluminum, Copper Other Base Metals Precious Metals Specialty Metals Metal Ores Met & Thermal Coal Other Substrates General Corporate Advisory Capital structure optimization Valuation services Fairness opinions 1. Investment banking services offered through INTL Trading, Inc. Member FINRA/SIPC.
INTL FCStone expertise
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