mcx gold futures: an opportunity for price risk management · 2012. 5. 12. · gold futures...

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MCX Gold futures: An opportunity for price risk management Shaivalya Thaker Manager-Training 25 August,2005

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Page 1: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX Gold futures:

An opportunity for price risk management

Shaivalya ThakerManager-Training

25 August,2005

Page 2: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Introduction

MCX Gold futures contracts

Features

Performance

Opportunity for price risk management

Strategies using futures

Implications

Page 3: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Introduction

Page 4: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Commodity futures•Meaning

• Benefits

• Pricing

•Meaning of Basis• Contango (Normal market)• Backwardation (Inverted market)

•Meaning of Spread• Intra commodity • Inter commodity

Page 5: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX Gold Futures contracts

Page 6: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Gold futures contracts at MCX

Gold

Price Quote: Rs./10 gms.

Trading unit/Lot Size: 1 kgMaximum Order: 10 kg.

Order Type1 Lot: 100: 1kg2 Lot: 200: 2kg3 Lot: 300: 3kg

Current contracts available for Trading at MCX

Gold OCT 2005( Expiry date- 5th Oct 2005)

Gold DEC 2005( Expiry date- 5th Dec 2005)

Example:

Price Quote:Rs.6000/10gms

Margin:3.5%

Margin:Rs.21000/-

Page 7: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Contract detailsMCX Gold October 2005 futures contract

Price Quote : Ex-Ahmedabad

Margin : 3.5%

Daily price limit : 2.5%

Delivery lot : 1 Kg.

Delivery center : Ahmedabad/Mumbai

Delivery type : Compulsory

Delivery standards : as per the contract specification

Tender & Delivery period : 1st October, 2005 to 6th October,2005

Approved warehouse/vault : Group 4 at Ahmedabad/Mumbai

Page 8: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Silver futures contracts at MCX

Silver

Price Quote: Rs./1 Kg.Trading unit/Lot Size: 30 Kg.

Maximum Order: 600 Kg.

Order Type1 Lot: 30: 30kg2 Lot: 60: 60kg3 Lot: 90: 90kg

Current contracts available for Trading at MCX

Silver SEP 2005( Expiry date- 5th Sep 2005)

Silver DEC 2005( Expiry date- 5th Dec 2005)

Example:

Price Quote:Rs.10500/1Kg

Margin:5%

Margin:Rs.15750/-

Page 9: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Features

Page 10: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX Gold futures contracts

• Concurrent contracts

• Different types of contracts

• Longer trading hours

• T+1 settlement

• Delivery based settlement

•Multiple delivery center

• Deliverable gold bars of approved suppliers

Page 11: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Performance

Page 12: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX Gold futures contracts

• High volume

• High open interest

• Low impact cost

• High positive correlation with International prices

Page 13: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Volume

Page 14: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Open interest

Page 15: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX Gold futures price curve

Page 16: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Opportunity for price risk management

Page 17: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MEANING :

Buying a futures contract to hedge physical position

PARTICIPANTS :

Dealers/Fabricators/Jewellers

OBJECTIVES :

•To protect increase in the cost of raw material.

•To replace inventory value at a lower prevailing cost.

•To protect uncovered sale of finished products.

Long hedge

Page 18: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Price fix hedge-An illustration

Market Date Natureof tran.

Market Price Date Natureof tran.

Market Price Profit/(loss)

Spot 11-Jun-05 6100 11-Jun-05 BUY 6230

Futures 21-Jun-05 BUY 6121 21-Jun-05 SELL 6249 128

Net purchase price 6102

Date Spot price Gold AUG 2005

11-JUN-2005 6100 6121

Date Spot price Gold AUG 2005

21-JUN-2005 6230 6249

Page 19: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Long hedge

Page 20: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Short hedge

MEANING :

Selling a futures contract to hedge physical position

PARTICIPANTS :

Dealers/Fabricators/Jewellers

OBJECTIVES :

•To protect the price of finished product.

•To protect price of inventory not covered by sale.

•To protect price for estimated production of finished product.

Page 21: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Offset hedge-An illustration

Market Date Natureof tran.

MarketPrice

Date Natureof tran.

Market Price Profit/(loss)

Spot 11-Jul-05 BUY 6090 21-Jul-05 SELL 6060 -30

Futures 11-Jul-05 SELL 6099 21-Jul-05 BUY 6049 50

NET 20

Date Spot price Gold AUG 2005

11-JUL-2005 6090 6099

Date Spot price Gold AUG 2005

21-JUL-2005 6060 6049

Page 22: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Short hedge

Page 23: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Rolling over the hedge position

Hedging horizon longer than available futures contracts

Rolling over before enters into delivery period

Liquidity risk

Basis risk

Page 24: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Roll over

Page 25: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Strategies using futures

Page 26: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Investment/Trading

MEANING :

Buying a futures contract /Selling a futures contract

PARTICIPANTS :

Investors/Traders

OBJECTIVE :

To earn from expected increase / decrease in the futures price based on

fundamental / technical analysis.

Page 27: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Spread

MEANING :

Buying a near month futures contract and selling a far month futures

contract / Selling a near month futures contract and buying a far month

futures contract

PARTICIPANTS :

Investors/Traders

OBJECTIVE :

To earn from existing spread between near month futures contract and far

month futures contract.

Page 28: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

MCX prices

Page 29: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Arbitrage

MEANING :Cash and carry arbitrage means buying physical asset with borrowedfunds and simultaneously selling the futures contract which is closed by

delivering physical asset on maturity of the futures contract.

Reverse cash and carry arbitrage means lending funds realized by selling

physical asset and simultaneously buying the futures contract which is closed by taking delivery of physical asset on maturity of the futures contract.

PARTICIPANTS :Arbitragers/Financers

OBJECTIVE :To earn from the existing difference between spot and futures prices.

Page 30: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Arbitrage

Cash & carry arbitrage opportunity when

F (o , n) > S(o) (1+c)

Reverse cash & carry arbitrage opportunity when

F (o , n) < S(o) (1+c)

Page 31: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Implications

Page 32: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Implications

Hedging

Hedging reduces or limits the price risk associated with the physical asset

Outright position

Outright position is risky as it is a leveraged transaction.

Spread trading

Spread trading is an yield improvement strategy which is less risky than

outright position & payoff does not directly depend on the direction of the

price movement.

Arbitrage

Arbitrage transaction results in minimum profit potential subject to execution risk.

Page 33: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:

Thank You

Page 34: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order:
Page 35: MCX Gold futures: An opportunity for price risk management · 2012. 5. 12. · Gold futures contracts at MCX Gold Price Quote: Rs./10 gms. Trading unit/Lot Size: 1 kg Maximum Order: