silver brochure
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SILVERHEDGING PRICE RISK
“Purge the dross from the silver, and the material for a vessel comes forth for the silversmith”. The Bible
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OVERVIEW
PRICE RISK MANAGAMENT
Silver is a brilliant grey-white metal that
is soft and malleable. Its unique
properties include its strength,
malleability, ductility, electrical and
thermal conductivity, sensitivity, high
reflectance of light, and reactivity. Silver
is found in native form, as an alloy with
gold (electrum), and in ores containing
sulphur, arsenic, antimony or chlorine.
Risk management techniques are of
critical importance for participants, such
as producers, exporters, marketers,
processors, and SMEs. Modern
ilver has been used for thousands of years for ornaments and utensils,trade, and as the basis for many monetary systems. Its value as aS precious metal was long considered second only to gold. Silver and
silver alloys are used in the construction of high-quality musical windinstruments of many types. Silver's catalytic properties make it ideal for useas a catalyst in oxidation reactions, for example, the production of
formaldehyde from methanol and air by means of silver screens or crystallitescontaining a minimum 99.95 weight-percent silver. Silver (upon somesuitable support) is probably the only catalyst available today to convertethylene to ethylene oxide (later hydrolyzed to ethylene glycol used for making
polyesters—an important industrial reaction). It is also used in the Oddytest to detect reduced sulphur compounds and carbonyl sulfides. Because silverreadily absorbs free neutrons, it is commonly used to make control rods toregulate the fission chain reaction in pressurized water nuclear reactors,
generally as an alloy containing 80% silver, 15% indium, and 5%cadmium. Silver is used to make solder and brazing alloys, and as a thinlayer on bearing surfaces can provide a significant increase in gallingresistance and reduce wear under heavy load, particularly against steel.
Source: Wikipedia, Silver Institute
SILVER : HEDGING PRICE RISK
techniques and strategies, including
market-based risk management
financial instruments like 'Silver Futures',
offered on the MCX platform can
improve efficiencies and consolidate
competitiveness through price risk
management. The importance of risk
management cannot be overstated; the
government too has set up high-level
committees to suggest steps for
fulfilling the objectives of price
discovery and price risk management oncommodity derivative exchanges. The
role of commodity futures in risk
management consists of anticipating
price movement and shaping resource
allocations, and these ends can be
achieved through hedging.
Hedging is the process of reducing or
controlling risk. It involves taking equal
and opposite positions in two different
markets (such as spot and futures market),
with the objective of reducing or limiting
risks associated with price change. It is a
two-step process, where a gain or loss in
the physical position due to changes inprice will be offset by changes in the value
on the futures platform, thereby reducing
or limiting risks associated with
unpredictable changes in price.
HEDGING MECHANISM
Price Movement
CME Parity ` /Kg MCX /Kg `
2
30000
33000
36000
39000
42000
45000
48000
51000Firm US Dollar, fear of
hike in US interest ratesFed tapering
Possibililty hikeby US FED by September
of rate
Supply tightness
US Fed announces interestrates to remain low
Euro zone worries,safe haven buying
Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15
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3
Siemens India Limited
Endeavour Silver Corp.
Odyssey Marine Exploration,Inc
“The Company uses Commodity FutureContracts to hedge against fluctuation incommodity prices.”
Source: Annual Report, 2013.
Source: Annual Report, 2013.
Source: Odyssey's Gairsoppa Silver Monetization
Strategy Results.
Parko Commodities
Parker Bullion
Johnson Matthey
Larsen and Toubro Limited
“As hedgers we use these contracts to manageprice risk on an expected purchase or sale of th ephysical metal.”
“Price Risk Management is an important aspectin managing our balance sheet and futurestrading has been of immense importance to ourindustry considering the volatile price scenario.”
“Fluctuations in precious metal prices can h avea significant impact on Johnson Matthey'sfinancial results, our policy for allmanufactuiring businesses is to limit thisexposure by hedging against future pricechanges where such hedging can be done atacceptable cost.”
“In line with the Company's risk managementpolicy, the various financial risks mainly relatingto changes in the exchange rates, interest ratesand commodity prices are hedged by using acombination of forward contracts, swaps andother derivative contracts, besides the naturalhedges.”
“The Company has not engaged in any hedgingactivities, other than short term metal
derivative transactions less than 90 days, toreduce its exposure to commodity price risk.”
“Odyssey Marine Exploration, Inc., a pioneer inthe field of deep-ocean exploration has to-datemonetized over 900,000 troy ounces of the
silver recovered from the Gairsoppa shipwreckin July 2013 at an average price per ounce of$23.56 for a gross total of $21.5 million. Thecompany estimates that the monetization andhedging program generated total grossproceeds of approximately $39 million from the2013 recovery, in addition to approximately$41 million generated in the prior year from the2012 recovery.”
Source: Annual Report, 2013.
Source: Annual Report 2013 -14.
SILVER : HEDGING PRICE RISK
Hedging ExperienceIn the international arena, hedging in
Silver futures takes place on a number of
exchanges, the major ones being
Chicago Mercantile Exchange (CME),
Multi Commodity Exchange of India Ltd.
(MCX), Shanghai Futures Exchange
(SHFE) and Tokyo Commodity Exchange
(TOCOM).
Hedging is critical for stabilizing
incomes of corporations and individuals.
Reducing risks may not always improve
earnings, but failure to manage risk will
have direct repercussion on the risk
bearers' long-term income.
To gain most from hedging, it is
essential to identify and understand the
objectives behind hedging. A good
hedging practice, hence, encompassesefforts by companies to get a clear
picture of their risk profile and benefit
from hedging techniques.
MCX offers a transparent hedging
platform, besides bringing about
economic and financial efficiencies by
de-risking production, processing, and
trade. The Exchange's engagement has
led to large efficient gains in supply
chains, with exporters gaining a larger
IMPORTANCE OF HEDGING
PARTICIPANT HEDGERS
share of global prices, and producers
getting better prices and much better
access to markets.
All those who have or intend to take
positions in physical silver are
participant hedgers. These are:
l
Importersl Exporters
l Refiners
l Jewellers
l Designers
l Market intermediaries
l Merchandisers
l Prices ruling in the international
markets
l Currency exchange rate movements,
especially US Dollar
l Economic factors: industrial growth,
global financial crisis, recession and
inflation
l Government trade policies (import
duties, penalties, and quotas)
l Geopolitical events
l Interest rate movements and prices of
gold
FACTORS AFFECTING PRICE
VARIATIONS
The mining of silver began some 5000 years
ago. Silver was first mined in about 3000 B.C.
in Anatolia (modern day Turkey). The
principal sources of silver are the ores of silver,
silver-nickel, lead, and lead-zinc obtained from Peru,
Bolivia, Mexico, China, Australia, Chile, Poland, and
Serbia. Peru, Bolivia, and Mexico have been mining
silver since 1546, and are still major world producers.
The top three silver-producing mines are Cannington
(Australia), Fresnillo (Mexico), and San Cristobal(Bolivia), In Central Asia, Tajikistan is known to have
some of the largest silver deposits in the world. The
metal is primarily produced as a byproduct of
electrolytic silver refining, gold, nickel, and zinc
refining, and by application of the Parkes process on lead metal obtained from lead ores
that contain small amounts of silver. Secondary silver sources include coin melt, scrap
recovery, and dis-hoarding from countries where export is restricted. Secondary sources
are price sensitive.
Source: Wikipedia, Silver Institute
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4
SILVER : HEDGING PRICE RISK
APPRECIATING THE BENEFITS OF HEDGING
A situation prevailing in the Silver industry are given below, which will demonstrate how MCX platform may be used by
participants to manage price risk by entering into Silver Futures contracts. We will look at the effect of price movement in either
direction.
SCENARIO 2
SCENARIO 1
THE SITUATION
G.K Jewellers is a company involved in the manufacture and retail sales of jewellery and silverware. Due to upcoming festive season silverware segment has seen a
sharp growth in consumer demand in volume. Price volatility is of big concern to the company. A consultant appointed by the management has recommendedthat price risk should be managed by taking up position on MCX.sales
EXPLANATION
The Treasury Team of G. K Jewellers, short sells 70 lots (1 lot = 30 Kg) of 5th September contract on 12th July and squares the contracts on 30th July. The value of raw
material in the finished goods sale is ` 8,27,40,000 (39400x70x30) and cash inflow from MCX due to fall in prices is 23,10,000 (1,100x70x30). Thus, the net value
realized from the sale of finished goods is ` 8,50,50,000 (8,27,40,000 + 23,10,000), making the net selling price ` 40,500 per kg (8,50,50,000/2100), which is the
budgeted price.
`
EXPLANATION
The Treasury Team of G. K Jewellers, short sells 70 lots (1 lot = 30 kg) of 5th September contract on 12th July and
squares the contract on 30th July, making a loss of ` 1,100 per kg. The value of raw material in the finished goods
sale is ` 8,73,60,000 (41,600x70x30) on 30th July and cash outflow on MCX due to rise in prices is ` 23,10,000
(1,100x70x30). Thus, the net value realized from the sale of finished goods is ` 8,50,50,000 (8,73,60,000 -
23,10,000), making the net selling price ` 40,500 per kg (8,50,50,000/2100), which is the budgeted price.
The company, G.K Jewellers has routine sales of 5000 pieces of silverware every month. Based on experience, the company has put forward the following facts:
1. The company purchases 2.1 tonnes of Silver every week to conduct routine production
2. The processed material will be ready to be sold in 2 weeks
3. The sale price of finished goods will be as per prevailing price at the time of final sales
4. It is difficult to predict the sales price 2 weeks ahead
5. The company's objective is to lock prices
GOING SHORT: Scenarios where prices either rise or fall
IF PRICES WERE TO RISE
IF PRICES WERE TO FALL
DATE
SELL Silver Futures Contract
Processed material soldat ruling price
MCX PLATFORM PHYSICAL MARKET
DATE
BUY Silver Futures Contract
SELL Silver Futures Contract
The net position of the above transactions will negate price risk
MCX PLATFORM PHYSICAL MARKET
Futures
Futures
12-07-201X
12-07-201X
30-07-201X
30-07-201X
40,600
40,600
39,500
41,700
1,100 (profit)
1,100 (loss)
39,400
41,600
12-07-201X
12-07-201X
30-07-201X
30-07-201X
Spot
Spot
SELL
SELL
SELL
SELL
BUY
BUY
( ` /1 kg)
DATE
12-07-201X
30-07-201X
40,500 40,600
39,50039,400
SILVER SPOT PRICE SILVER FUTURES PRICE(expiry 5th September 201X)
( ` /1 kg)
DATE
12-07-201X
30-07-201X
40,500 40,600
41,70041,600
SILVER SPOT PRICE SILVER FUTURES PRICE(expiry 5th September 201X)
Net Selling price: 40,500 ( 41,600- 1,100) ` ` `
Net selling price: 40,500 ( 39,400 + 1,100) ` ` `
HEDGING AGAINST DOMESTIC SALES
Note: The objective is to lock in prices, to obtain protectionfrom unwanted price volatility, which affects the balance sheet of the company. This has been achieved, throughhedging on MCX in both the scenario of rising and falling prices, by which G.K Jewellers has been able to sell thefinished material at the budgeted price itself.
BUY Silver Futures Contract
Raw material bought
BUY 40,500
Processed material soldat ruling price
Raw material bought
BUY 40,500
12-07-201X
30-07-201X
The net position of the above transactions will negate price risk
12-07-201X
30-07-201X
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SILVER : HEDGING PRICE RISK
THE SITUATION
Bharat Silver Ltd primarily a silver importer, who imports, stocks and sells silver in various denominations to a host of users. The silver market has been extremely
unpredictable due to price volatility, which is a reflection of international and domestic factors and currency movements. Bharat Silver imports large quantities of silver
and sells them in a staggered manner to the physical market at the prevailing prices. The huge stock of imported silver it holds over a long time-period exposes Bharat
Silver to very high risks as silver prices are highly volatile. The company hedges on MCX to effectively manage its commodity and currency risk.
Hedging against Staggered Sales
Bharat Silver Ltd, imports silver in huge quantities and sells it in a staggered manner in the physical market, at the prevailing market prices
1. The company imports on 20th October 5,000 kg of Silver
2. The company imports and caters to the physical demand of the buyers at the prevailing market price
3. The company manages to sell 500 kg of the imported 5,000 kg on 20th October itself. Thus, there is no price risk in the sale of the first lot.
4. The remaining 4,500 kg will be sold in subsequent days at ruling prices
5. The company hedges for 4,500 kg
GOING SHORT: Scenarios where prices either rise or fall
The Treasury Team of Bharat Silver Ltd, short sells 4,500 kg (1 lot = 30 kg) of 5th December contract on 20th October and squares the position in a staggered
manner on subsequent days, whenever the company sells Silver to the physical market at the prevailing spot market price. The company by hedging its position
and making a staggered exit from the futures contract makes the net selling price at ` 40,550 per kg, which is the budgeted price.
DATE
SELL 1500 kg
IMPORTSELL 5000 kg and500 kg
MCX PLATFORMPHYSICAL MARKET
( ` /1 kg)
DATE
20-10-201X27-10-201X
40,550 40,60040,90040,850
SILVER SPOT PRICE SILVER FUTURES PRICEth
(expiry 5 December 201X)
Open Interest
in lots on MCX
SELL 2100 kg
SELL 900 kg
BUY 50 lots of Silver Futures
BUY 70 lots of Silver Futures
BUY 30 lots of Silver Futures
150
100
30
0
SELL 150 lots of Silver Futurescontract (30 kg each)
04-11-201X
11-11-201X
40,150 40,200
41,40040,350
DATE SPOT MARKET
ACTION
NET SELLING PRICE
per kg
PROFIT/LOSS per kg
on MCX
FUTURES MARKET
ACTIONS
20-10-201X
27-10-201X
04-11-201X
11-11-201X
SELL
SELL
SELL
BUYSELL
BUY
BUY
BUY
SELL
IMPORT5000 kg
Sell 500 kg@ ` 40,550
Sell 1500 kg@ ` 40,850
Sell 2100 kg@ ` 40,150
Sell 900 kg@ ` 41,350
150 lots@ ` 40,600
50 lots@ ` 40,900
70 lots@ ` 40,200
30 lots@ ` 41,400
` 300 Loss)(
` 400 (Profit)
` 800 (Loss)
` 40,550
`
( ` `
40,55040,850 - 300)
` 40,550( ` 40,150 + ` 400)
` 40,550( ` 41,350 - ` 800)
Explanation
SILVER FACTS
Silver has innumerable applications in art, science, industry and beyond. At the highest level, though, demand for silver
breaks down into three important categories: silver in industry, investment, and silver jewellery and décor. Together, these
three areas represent more than 95% of the annual silver demand. With unique properties, including its strength,
malleability, and ductility; its electrical and thermal conductivity; its sensitivity to and high reflectance of light; and the
ability to endure extreme temperature; it is an element without substitution. Islam permits Muslim men to wear silver
rings on the little finger of either hand. In the Americas, high temperature silver-lead cupellation technology was
developed by pre-Inca civilizations as early as AD 60–120. Silver plays no known natural biological role in humans, and
possible health effects of silver are a disputed subject. Commercial-grade fine silver is at least 99.9% pure, and purities
greater than 99.999% are available.
20-10-201X
27-10-201X
04-11-201X
11-11-201X
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6
How much Volatility Risk are you Exposed to?
SILVER : HEDGING PRICE RISK
Daily Average Volatility Silver MCX (Near Month Continuous Prices)
REGULATORY BOOST TO HEDGERS
1. Income tax exemptions for
hedging. The Finance Act, 2013, has
provided for coverage of commodity
derivatives transactions undertaken in
recognized commodity exchanges
under the ambit of Section 43(5)
of the Income Tax Act, 1961, on thelines of the benefit available
to transactions undertaken in
recognized stock exchanges.
This effectively means that business
profits / losses can be offset by losses/
profits undertaken in commodity
derivatives transactions. This
enhances the attractiveness of risk
management on recognized
commodity derivative exchanges and
incentivizes hedging. Hedgers are no
longer forced to undertake physical
delivery of commodities to prove that
their transactions are in the nature of
hedging and not 'speculation'.
2. Limit on open position as against
hedging. This enables hedgers totake positions to the extent of their
exposure on the physical market and
are allowed to take position over and
above prescribed position limits on
approval by the exchange.
3. Early pay-in benefit. If a hedger
makes an early pay-in of commodity,
he is exempted from paying all
applicable margins.
BENEFITS OF HEDGING ON MCX
l India's no. 1 commodity exchange totrade Silver futures
l Highly liquid contracts
l Highly efficient and transparentmarket
l Low impact costs (trading costs)because of tight bid-ask spreads
l Deliverable contract withinternationally accepted silver bars
l Flexibility to choose from differentcontract sizes
l The market is operational during theday and evening session, enablingparticipants to take part in pricediscovery when global markets areactive.
Year
AnnualisedVolatility
2009
2010
2011
2012
2013
25%
21%
37%
19%
29%
Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-15
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
Aug-14
2014 21%
Silver: Witnessed annualized price volatility of about 23% in 2014
Are you prepared for volatility risk?Adoption of a risk management practice, such as hedging on the MCX, can help shield againstthe perils of price volatility.
Which means
A firm in the silver business, with an annual turnover of ` 100 crore was exposed to a price riskof 23 crore in 2014.
India, with an annual silver market size of 5000 tonnes, worth about 23,000 crore, is exposedto price volatility risk of about 5,300 crore (i.e. 23% of the holding value).
`
`
`
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Commodity Silver Silver Mini Silver Micro
Contracts Available
th th st stContract Start Day 16 day of contract launch month. I f16 day is a holiday then the following 1 day of contract launch month. I f 1 day
working day. is a holiday then the following Day
th thLast Trading Day 5 day of contract expiry month. I f 5 day Last calendar day of the contract month. I f last calendar day is a holiday then
is a holiday then preceding working day. preceding working day.
Trading Period Monday through Friday (10.00 a.m. to 11.30 / 11.55 p.m.)
Trading Unit 30 kg 5 kg 1 kg
Quotation/ Base Value 1 kg
Maximum Order Size 600 kg
Price Quote Ex-Ahmedabad ( inclusive of a ll taxes and levies relating to import duty, customs i f applicable but excluding sales tax / VAT,
any other additional tax or surcharge on sales tax, local taxes and octroi)
Tick Size ` 1 per kg
Daily Price Limit The base price limit will be 4%. Whenever the base daily price limit is breached, the relaxation will be allowed upto 6% without anycooling off period in the trade. In case the daily price limit of 6% is also breached, then after a cooling off period of 15 minutes, the
daily price limit will be relaxed upto 9%
In case price movement in international markets is more than the maximum daily price limit (i.e 9%), the same may be further
relaxed in steps of 3% beyond the maximum permitted limit, and inform the Commission immediately.
Initial Margin Minimum 5 % or based on SPAN whichever is higher
Additional and / or Special Margin In case of additional volatility, an additional margin (on both buy & sell side) and/ or special margin (on either buy or sell side) at
such percentage, as deemed fit; will be imposed in respect of all outstanding positions.
Maximum Allowable Open Position For individual clients 100 MT or 5% of the market wide open position, whichever is higher for all silver contracts combined together
For a member collectively for all clients: 1000 MT or 20% of the market wide open position, whichever is higher for all silver contracts
combined together
Delivery Unit 30 kg
Delivery Centres Ahmedabad at designated Clearing House facilities
Quality Specifications Grade: 999 and Fineness: 999 (as per IS 2112: 1981)
• No negative tolerance on the minimum fineness shall be permitted.
• If it is below 999 purity, it is rejected.
It should be serially numbered silver bars supplied by LBMA approved suppliers or other suppliers as may be approved by MCX
Due Date Rate Due Date Rate is calculated on the Sett lement rate is f ixed by the Exchange on the last working day of contract
expiry day of the contract. This is expiry month. The settlement rate will be the official closing price on that day
calculated by way of taking simple fixed by the system for Silver 30 kg contract of immediate expiry.
average of last 3 days s pot market
prices of Ahmedabad.
Delivery Logic Compulsory Both Option
Note: Please refer to the exchange circulars for latest contract specifications
* Genuine hedgers having underlying exposure that exceed the prescribed OI limits given in the contract specifications can be allowed higher limits based on approvals.
March, May, July, September, December February, April, June, August, November
7
SALIENT CONTRACT SPECIFICATIONS OF SILVER FUTURES CONTRACTS
SILVER : HEDGING PRICE RISK
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Weight Conversion Table
100 kg 3.11031
Ton Troy Ounces 32,150.7466
Ton Grams 1,000,000
To convert To Multiply by
from
Troy Ounces
©MCX 2014. All rights reserved.
Content by: MCX Research & Planning
Designed by: Department of Corporate Communications, MCX
Please send your feedback to: [email protected]
Corporate address: Exchange Square, Chakala, Andheri (East), Mumbai - 400 093, India, Tel. No. 91-22-6731 8888,
CIN: L51909MH2002PLC135594, [email protected], www.mcxindia.com
World Silver Statistics
Important Websites: www.gfms.co.uk | www.cmegroup.com | www.silverinstitute.org
SILVER : HEDGING PRICE RISK
Top 10 Silver-Producing Companies in 2014
Top Silver-Producing Countries in 2014 World’s Leading Primary Silver Mines
Visible Supply of Silver to the Market
(Million ounces) 2013 2014
Mine Production 835.3 877.5
Above-Ground stocks 165.2 184.3
…of which scrap 192.7 168.5
…of which hedging supply -35.4 15.8
…of which ETF drawdown - -
…of which Government Sales 7.9 0
Total Visible Supply 1,000.5 1,061.8
Note: This is “visible supply”, therefore the withdrawal of metal via ETFand futures exchange additions or de-hedging is treated as zero.
Source: The Silver Institute Source: GFMS
India Silver Demand
Year Tonnes
2004 7832005 7242006 7162007 2,4892008 5,0492009 1,274
2010 2,9762011 4,1202012 1,9222013 5,8192014 6,843
40.4 40.4
36.8
34.934
30
32
34
36
38
40
42
Mexico Poland Canada Switzerland Australia
Fre snillo plc. KGH M Polsk aMiedź S.A.
G oldc orp Inc. G lenc oreXstrataplc.
BHP Billiton plc.
192.9
121.5 114.7
59.4
50.6
0
50
100
150
200
250
Mexico Peru China Australia Chile0
5
10
15
20
25
30
24.73
BHP Billiton plc.
Cannington,Australia
20.3
Tahoe ResourcesInc.
Peru
20.1
Fresnillo plc.
Fresnillo Mine,Mexico
19.5
PolymetalInternational plc.
Dukat, Russia
15.4
Fresnillo plc.
Saucito, Mexico
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
M i l l i o n o u n c e
Mine Production Total Supply Physical Demand
Source: The Silver Institute
M i l l i o n o u n c e
Source: The Silver Institute
Source: The Silver Institute Source: The Silver Institute
M i l l i o n o u n c e
M i l l i o n o u n c e