Perfectly Hedged A Practical Guide To Base Metals (eBook)

Samuel Basi (Autor)

eBook Download: EPUB

2024 | 1. Auflage
136 Seiten
Bookbaby (Verlag)
979-8-3509-8101-8 (ISBN)

Infos

In the competitive world of commodities trading, the margins are where you can get an edge. 'Perfectly Hedged' simplifies and explains hedging, a subject that is often viewed as highly technical, frequently misunderstood, and is the cause of avoidable, costly mistakes. Through an easy-to-follow, comprehensive book, you will obtain, and importantly retain this key knowledge that is vital to the long-term success of trading firms. Featuring 18 chapters on: 1. Introduction to Hedging 2. What Hedging Is and Why It Is Necessary 3. How Metal Prices Are Determined 4. Hedging in Practice 5. 'The Perfect Hedge' 6. Position Management 7. Physical Shipments 8. How to Become a P&L Generator 9. Hedging Errors 10. Warrants 11. Arbitrage 12. Premium Hedging 13. Foreign Exchange Hedging 14. Spread Cards 15. Initial & Variation Margin 16. Simple Option Contracts For Hedging 17. Price Participation 18. Shanghai Futures Exchange 'This is the first book I have read that walks you through the intricacies of commodity hedging in a methodical, easy-to-follow way. Finally!' Tristan Busch, Founder, Zopco SA

Samuel began his career in 2009 at Trafigura's head office for metals in Lucerne, Switzerland. He quickly became responsible for operations of refined aluminum, zinc, and lead contracts with exposure to Europe, the Middle East, and Asia. In 2010, Samuel moved to Trafigura's US office in Stamford, CT, where he continued in a senior operations role covering refined lead, zinc, and copper contracts, focusing on North and South American business. In 2011, Samuel was promoted to the deals (hedging) desk, where he spent time in the head office in Switzerland before he moved back to run the North American deals desk. Samuel mitigated the outright price, arbitrage (CME/LME), and spread risks for the North and South American refined and concentrates markets across all base metals and FX exposures. In January 2012, at age 24, Samuel was promoted to become one of the youngest physical traders in Trafigura's history. During this time, he built out and traded the refined lead and zinc books for the domestic US market. He later added the South American refined lead and zinc books to his portfolio. With global exposure to imports and exports, along with building a domestic book of over 300,000mt/annum, Samuel increased the book size by 500% across his tenure at Trafigura. Following Trafigura's acquisition of Nyrstar, Samuel played a pivotal role in the marketing and integration of the Nyrstar Clarksville Zinc smelter. In November 2019, Samuel moved to join Greenwich Metals Inc (GMI), where he built and ran the derivatives desk from the ground up. He provided an internal brokerage to hedge the entire physical book of GMI, mitigating the group's risk across refined base metals, scrap metals, concentrates, precious metals, and FX. He built a successful prop trading book and took speculative positions across base metals on both the LME and CME exchanges, FX, and precious metals. He combined his knowledge of fundamental trading, and quantitative, systematic trading, to develop both long and short-term strategies to generate significant returns. While at GMI, he was a member of the risk committee and held company-wide seminars on managing risk across various futures exchanges and products. Samuel has a proven track record of building excellent relationships with clients, brokers, banks, and traders across the physical and derivative metal markets. His continued YOY results over the past 15 years are a testament to his abilities as a trader and the dedication of his craft. In November 2023, Samuel took his 15 years of trading knowledge and created Perfectly Hedged LLC. Perfectly Hedged is a consultancy and training firm that simplifies and explains hedging; a misunderstood subject that is often viewed as highly technical, and is the cause of avoidable, costly mistakes. Samuel authored a book, 'Perfectly Hedged A Practical Guide To Base Metals', a comprehensive look at hedging in commodity firms. Unlike other industry literature, it is targeted to middle and back office staff, and utilizes real-world scenarios that employees will encounter on a daily basis. By pairing his book with tailored, interactive, in-person classes, employees will obtain -- and retain -- key knowledge that is vital to the long-term success of trading firms.

---

In the competitive world of commodities trading, the margins are where you can get an edge. "e;Perfectly Hedged"e; simplifies and explains hedging, a subject that is often viewed as highly technical, frequently misunderstood, and is the cause of avoidable, costly mistakes. Through an easy-to-follow, comprehensive book, you will obtain, and importantly retain this key knowledge that is vital to the long-term success of trading firms. Unlike other industry literature, "e;Perfectly Hedged: A Practical Guide to Base Metals"e;, breaks down complex concepts across 18 chapters, making it easy for middle and back-office employees to digest the information. Highlights include straight-forward and easy-to-follow language, real-life examples, and a quiz at the conclusion of the book. Increase your understanding of hedging and boost your confidence. Immediately apply learnings to your day-to-day work. Improve ROI and get a valuable advantage over your competitors. Featuring 18 chapters on:1. Introduction to Hedging2. What Hedging Is and Why It Is Necessary3. How Metal Prices Are Determined4. Hedging in Practice5. "e;The Perfect Hedge"e;6. Position Management7. Physical Shipments8. How to Become a P&L Generator9. Hedging Errors10. Warrants11. Arbitrage12. Premium Hedging13. Foreign Exchange Hedging14. Spread Cards15. Initial & Variation Margin16. Simple Option Contracts For Hedging17. Price Participation18. Shanghai Futures Exchange"e;This is the first book I have read that walks you through the intricacies of commodity hedging in a methodical, easy-to-follow way. Finally!"e;Tristan Busch, Founder, Zopco SA

Textauszug

3. How Metal Prices Are Determined

In this chapter, I will give a brief explanation of the two most commonly used exchanges for metals trading outside of China: the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME). These are the two exchanges you will almost certainly be exposed to. I will also explain the price setting mechanisms for each exchange, because there are some key differences between the two.

Knowing every detail about an exchange and how it functions may not be necessary for your day-to-day job. However, I have found that having some basic knowledge about the exchanges commodity companies trade on enhances employees’ understanding of why and how metals trade the way they do, and why hedging is so important to the long-term profitability of commodity companies.

LME

The LME is the oldest metal trading exchange in the world. Initially founded in 1877 (but with roots going back as far as the opening of the Royal Exchange in London in 1571), it is the largest metal exchange in the world, used by traders across the globe as the main source for price discovery for base metals. Currently, the LME trades aluminum, aluminum alloy, cobalt, copper, lead, nasaac, nickel, steel, tin, and zinc. Some of these metals are much more liquid than others, meaning the volume of futures contracts traded daily are much higher than others. It is going to be easier to hedge large tonnage of metal on markets with higher liquidity (aluminum, copper, lead, zinc, nickel) compared to the lower liquidity markets (aluminum alloy, cobalt, nasaac, steel, tin).

The LME is unique in a couple of ways compared to other exchanges. Although most trading volume is now executed through the LME’s online trading platform, the official prices from the second trading session each day are still set using open outcry. Traders will shout prices to each other, use hand signals, and relay those prices back to clerks who have clients on multiple phones, buying and selling all in real time.

The area where traders shout prices across to each other is known as the ring. While today the ring comprises red leather sofas set in a circle, it originally got its name when metals trading moved to the Jerusalem Coffee House in the early 19th century. When all the traders had gathered, a circle would be drawn in chalk on the floor, and they would stand around the ring to trade. While the ring and its long-term viability are a constant discussion, for now, floor traders still make their way to the ring two times per day, where a five-minute trading session for each metal is used to set official prices. The last official session of the day is called the kerb and is now carried out electronically with closing prices being determined using a volume weighted average pricing mechanism (VWAP). The kerb gets its name from the same era as the chalk ring. In the early days of the LME, traders who wanted to continue trading after time was up would step outside onto the street and trade on the kerb of the pavement (curb of the sidewalk).

To trade directly on the LME requires an LME membership-these memberships range from category 1 (the highest) to category 7 (the lowest). The privileges of membership decrease as the membership category lowers. Only category 1 through 4 members can trade directly on the LME. This does not mean that everyone who hedges their physical metal has to be an LME member, but it does mean they will utilize LME brokers who are LME members.

Access to the LME ring is reserved for brokers with a Category 1 membership. As of the time of writing, eight companies are Category 1 LME members. Only traders from these companies are allowed to sit in the ring and take part in the open outcry sessions. In each five-minute trading session, official prices are set for cash and three-month (3M) prompts, which are the last prices bid and offered for each prompt date for each metal. The online platform of the LME is open for trade from 1 a.m. London until 7 p.m. London every business day.

The other unique aspect of the LME is that (barring steel and cash settled futures contracts) LME trades have settlement dates every business day of the year (on a rolling three-month basis), where most other exchanges have only one settlement date per month. The date a trade settles is known as the prompt date. If you wish, you can obtain a price for a settlement date, from as nearby as “tom” trades that settle the following business day, cash trades that settle in two business days (such as the official cash settlement trades), to as far out as five to ten years in the case of some metals. Typically, the further out a settlement date is needed, the less liquidity there will be, which will affect the value of that trade.

Base metal prices are obtained by LME brokers through the trading of lots. One lot of metal is defined by the LME as an exact number of metric tons for each metal as follows:

•Aluminum/copper/lead/zinc: 25 mt

•Aluminum alloy/nasaac: 20 mt

•Steel: 10 mt

•Nickel: 6 mt

•Tin: 5 mt

•Cobalt: 1 mt

You can only trade in whole lot sizes, so if you buy 2 lots of LME copper, you will be buying 50 mt of copper. You may have heard someone asking to buy or sell a number, then the metal. For example, “Where can I buy 10 December Ali?” means they want to buy 10 lots of December aluminum, equaling 250 mt. When hedging material, the brokers you may be dealing with (either internal or external) will generally talk in terms of number of lots rather than outright tonnage of metal. I suggest you become familiar with your multiplication tables, particularly twenty-five!

Outside of the official prices set in each of the three rings and the kerb, you are probably somewhat familiar with the prices you have seen flashing on screens. This price is known as the three-month price. If someone asks what the price of aluminum is, they are more than likely referencing the screen price, which is the 3M price. The reason the prices quoted on the screen are a three-month prompt date is because that was the approximate length of a voyage for a vessel carrying copper from Chile to the UK and tin from Malaysia to the UK at the time the exchange was founded.

Part of the reason I was initially drawn to commodity trading is because it is impossible to escape how interconnected your trading activity is to the real world. Traders needed a price for their copper and tin that reflected the reality of an actual vessel’s arrival to its destination. Your activities have a real world impact by forming a vital part of the supply chain for so many everyday products, and details like the LME 3M price are part of what keep me engaged and excited to be part of this industry.

CME

The CME was established in 1848 as the world’s first futures exchange. However, it was not until 2008 when the CME group acquired the NYMEX group-including their commodities exchange division (COMEX)-that base metal trading was brought under the CME umbrella. As of the time of this writing, copper is the only base metal that trades on the CME exchange with high volume compared to the LME. The vast majority of domestic copper producers and consumers in the US use CME prices for their physical contracts instead of the LME. Recently, the CME aluminum futures contract has seen an increase in volume, so we may over time see a real competitor to LME aluminum develop. The CME does have futures contracts for both lead and zinc, but at the time of writing, the open interest (total number of outstanding contracts) for these metals is extremely low. The CME has launched a cobalt contract which with the rise in electric vehicles globally, is starting to pick up volume. They are also the main liquidity provider for US and EU hot rolled coil (HRC) steel, and their lithium hydroxide contract has also seen huge growth over the last two years. The CME are (at the time of writing) making a real push on their molybdenum oxide contract - other exchanges have attempted this in the past without much luck, here is hoping the CME succeed in their attempt.

Base metals trading on the CME is entirely electronic and trades 23 hours a day, 5 days a week. For all metals trading hours are 6 P.M. Eastern time US until 5 P.M. Easten time US the following day, Sunday - Friday.

Unlike the LME, a futures contract on the CME only has one prompt date per month-the last business day of that month. For copper, the CME also has what are called active months: March, May, July, September, and December. These five months are by far the most traded prompts for CME copper. You can trade any forward month up to 24 months out, but the liquidity is extremely low on the non-active months.

Just like on the LME, CME copper is traded in lots, but where the LME trades in metric tons, CME copper trades in pounds (lbs), with one copper lot representing 25,000 lbs. This roughly equals 11.34 mt. The prices for CME copper are quoted in dollars and cents per pound. Trades are in whole lots, so you can only trade in multiples of 25,000 lbs. This means if you buy four lots of CME copper, you will be buying 100,000 lbs....

Produkt-Details

• Erscheint lt. Verlag: 17.10.2024
• Sprache: englisch
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• ISBN-13: 979-8-3509-8101-8 / 9798350981018