PowerPoint Presentation - Dubai Gold _ Commodities Exchange - PowerPoint by linzhengnd

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									Where Do Futures Prices Come From ?
 Stock Market: A share’s price / value is the
  equilibrium of supply and demand; the equilibrium
  of people’s opinion of what that share is worth
   50% of people think its worth more
   50% of people think its worth less
 Futures Market: The price / value of a Rebar
  Futures Contract is determined in the same way
       The price on the screen is the equilibrium of people’s
        opinion today of what BS 4449 Rebar will be worth –
        will be physically bought and sold for – in (the first
        week of) each quoted month, basis FCA (truck) Jebel
        Ali, customs cleared but duty unpaid

   Contango: forward prices higher nearby prices
   Backwardation: forward prices lower than nearby
    prices
Where Do Futures Prices Come From ?

   What factors effect what 10 mt of rebar will be
    worth in 30 / 60 / 90 days time ?
   Cost of carry: the costs of storage, insurance,
    money (exchange rates; interest rates), people etc
         Basically the monthly fixed & variable costs additional
          to the cost of goods previously purchased
   Market fundamentals (supply & demand), in the
    local, regional, and international markets
   Sentiment – what’s your view ?


Jun 5th        Month           Jul Aug Sep Oct         Nov Dec
               US$/mt          623 627 631 635         639 643

Sept 4th       Month           Sep Oct Nov Dec Jan Feb
               US$/mt          628 635 643 645 634 609
Principles of Hedging
 To mitigate the risk of physical market prices moving
  against you by taking equal and offsetting position in the
  futures market to that taken in the physical market.
 The desired effect is to balance the risks on both sides

 If you buy steel now, to sell later, simultaneously you
  should sell (the same amount of) steel futures
  now and buy them back later.
 Should prices fall:
     You lose money in physical steel (buy high, sell low = loss)
     You gain money in steel futures (sell high, buy low =
      profit)
 Should prices rise
     You make money in physical steel (buy low, sell high =
      profit)
     You lose money in steel futures (buy high, sell low = loss)

A key principle is ability to sell short, ie sell futures you don’t
yet own. You are selling a commitment you will deliver steel.
Principles of Hedging
 If you sell steel now, knowing you have to buy steel
  later to fulfill your sale commitment, you should
  simultaneously buy (the same amount of) steel
  futures now, to sell them back later.
 Should prices fall:
     You make money in physical steel (sell high, buy low =
      profit)
     You lose money in steel futures (buy high, sell low = loss)
 Should prices rise:
     You lose money in physical steel (sell low, buy high = loss)
     You make money in steel futures (buy low, sell high =
      profit)

A second key principle is that there is no perfect hedge; one that
wholly eradicates steel price risk. Rather, the following scenarios
   are
designed to illustrate the principles that can be used by many
participants of the steel supply chain to greatly reduce price
risk in their day to day business.
Principles of Hedging
The third key principle is that of Price Correlation.
 The price risk you are seeking to mitigate does not have
  to be in 16,20,25 & 32 mm BS 4449 Rebar in Dubai

 8, 12 & 40 mm is price correlated
 ASTM rebar is price correlated
 So are certain product markets of billet, merchant bar, wire
  rod
 Abu Dhabi is price correlated
 Rebar throughout the GCCC is price correlated
 So are certain rebar and other long product steel markets in
  East Africa, northern Middle East, Iran, SE Asia

 Hedgers should be looking for an 80% or more price
  correlation between their specific steel price risk and Dubai
  rebar price
STEEL REBAR PRICES
          650
                Correlations to Blended Rebar Price
                  MeSteel 99.38%
                  SBB 97.03%
          600     MBR 99.40%


          550



          500
US$/Ton




          450



          400



          350



          300
                                                                                              CFR Dubai - MeSteel
          250                                                                                 CFR Gulf States - SBB
                                                                                              CFR Persian Gulf - MBR
                                                                                              Blended Rebar Price*
          200
            Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07
                Source: MeSteel, Steel Business Briefing & Metal Bulletin Research
                * Average of Rebar Prices of MeSteel, MBR & SBB (Dubai/PersianGulf)
Rebar Price Correlations
    650
            360 days Correlation to Blended Rebar Price*
            CIS Billet CFR Dubai       90% (2007) MeSteel
    600     WireRod CFR Dubai          93% (2006) Metal Bulletin
            Rebar      CFR EastAsia 88% (2006) SBB
    550
            Billet     CFR EastAsia 84% (2006) SBB


    500



    450
US$/Ton




    400



    350



    300


                                                                      — Correlations to Blended Rebar Price*
    250
                                                                      — CIS Billet CFR Dubai (MeSteel) 97.77%
                                                                      — CIS Billet FOB BlackSea (Metal Bulletin) 97.22%
    200                                                               — WireRod CFR Dubai (MeSteel) 96.34%
                                                                      — Rebar CFR EastAsia (SBB) 92.48%
                                                                      — Billet CFR EastAsia (SBB) 94.54%
    150
       Sep-02 Jan-03 May-03 Sep-03       Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06      Jan-07 May-07
          * Average of Rebar Prices of MeSteel, MBR & SBB (Dubai/Persian Gulf)
Disclaimer

The information in this presentation is confidential and is intended for use
only by authorised recipients. It should not be reproduced or disclosed to
any other person without the prior written consent of Dubai Gold &
Commodities Centre (DGCX)

Authorised recipients of this presentation acknowledge that the material
in this presentation is copyrighted and may only use this material in
presentations and literature under the following conditions i) Any slide(s)
used must be reproduced without modification ii) DGCX must be
acknowledged as source of any material used in the body of any
document containing material from these presentations.

DGCX makes no representation or warranty (express or implied) of any
nature, nor does it accept any responsibility or liability of any kind, with
respect to the accuracy or completeness of the information in this
presentation
Thank You

  Q&A
For further information

   www.dmcc.ae
john.short@dmcc.ae
  +971 4 390 3899

  www.dgcx.ae
  info@dgcx.ae
 +971 4 361 1616

								
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