Avoid market risks

With the discovery of price and hedging risk in Chinese derivatives market, more and more China steel tube manufacturers begin to use derivatives to manage expectations and trade pricing, reasonably transfer the spot price risk to the futures market, to avoid the risks of raw materials increase and inventory impairment, stabilize price expectations, and lock profits.

After the May Day holiday this year, iron ore spot prices continued to rise. Considering that if iron ore high correction, is bound to cause the value of iron ore inventory shrinkage. To do so, Galaxy Futures offered steel company a hedge scheme for 100, 000 tons of iron ore stocks. Enterprises buy 1300-1100 yuan/ton bear market spread options, sell 1400 yuan/ton call options at the same time, and use the premium cost of no more than 10 yuan/ton (the total insurance premium is about 1 million yuan) to maintain inventory for one month. When futures fall to the range of 1,300-1,100 yuan/ton, enterprises can get price protection of up to 200 yuan/ton. From the results, the subsequent iron ore period spot fell sharply, according to the inventory of 100,000 tons to measure, theoretically help enterprises to avoid 20-million-yuan inventory impairment. The flexible business design and risk-return characteristics of rectangular hollow section options are suitable for iron ore futures combined with inventory management. In addition to the hedging of futures and options on the floor, over-the-counter options and option trading, base price is also an effective means to manage price risk at present. For a long time, the domestic ore pricing is mainly based on actual bargaining, which is greatly influenced by the regional market supply and demand, the profits of steel mills in the region, safety and environmental protection policies and other factors, so it is necessary to establish a reasonable market-based purchase and steel tubing prices method.

According to the results, the iron and steel company used two basis transactions to purchase a total of about 13,000 tons of domestic ore, effectively saving the procurement cost of 123,000 yuan (excluding tax). More importantly, the two sides narrow the price differences through reasonable market price benchmarks, give the buyer the right to price so that the company has the opportunity to reduce the purchase price, and hedge the risk through futures hedging, changing the previous antagonistic relationship of price game between the two sides of trade, and realizing mutual benefit and win-win situation for steel pipe manufacturer in China. In recent years, a number of iron and steel companies have established mature hedging risk management models, explored the use of futures tools to price their own domestic mineral resources, and actively promoted the basis pricing based on futures prices in the industry, which has expanded a new path for promoting the market-oriented pricing of domestic minerals.