GOLD HEDGING MCX

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GOLD HEDGING _at_ MCX
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Agenda

• About MCX
• What is Hedging
• Risks faced by Jewellers
• Volatility in Gold
• Why Hedge
• How to Hedge
• Contract Specifications
• Advantages
• Correlation with International Gold Prices

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An Overview

• MCX is a fully electronic multi commodity futures
  exchange with permanent recognition from Govt. of
  India.
• Live operations since November 10, 2003
• Average Daily Turnover Rs. 16,000 Crores (US
  3971.20 Mn)
• Highest Daily Turnover - Rs.22,774.73 Crores (US
  5645.89 Mn) 5 March 08
• Highest Daily Turnover GOLD Rs. 10802.83Crores
  (US 2748.8 Mn) 16 Jan 08
• Highest Daily Turnover SILVER - Rs. 7123.06
  Crores (US 1577.64 Mn) 20 April 06
• Operations from 650 centers with over 1800
  members 18000 Trading Terminals (TWS)
• Among the leading commodity exchanges globally
  (in terms of contracts traded)
• No. 1 in Silver futures trading
• No.3 in Gold and Crude Oil futures trading

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MCX Growth Story
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Gold Average Daily Turnover
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Silver Average Daily Turnover
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Hedging

• What is Hedging?
• Hedging means taking a position in the futures
  market that is opposite to a exposure in the
  physical market with objective of reducing or
  limiting risks associated with price changes.
• Any technique designed to reduce or eliminate
  financial risk for example, taking two positions
  that will offset each other if prices change

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Risks faced by Jewelers

• Commodity Price Risk
• Foreign Exchange rate Risk

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Risks faced by Jewelers

• Commodity Price Risk
• Commodity Price Risk Gold Price Risk (the
  change in the price of the gold)
• Affects profit margins
• Blocks capital

• Foreign Exchange Rate Risk
• Is the change in the relative values of
  currencies

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Commodity Price Risk

• The price of gold is affected by numerous
  factors
• Demand for gold in both jewellery and industrial
  uses
• International/regional, political/economic trends
• The relative strength of U.S dollars
• of other currencies
• Financial market expectations
• Numbers of speculative activities
• Reserves
• Number of forward sales
• Production and cost levels for gold

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Volatility in Gold Prices
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Why Hedge?

• The wholesalers and retailers that make up this
  market are, or should be, more concerned with
  generating profit from the difference between
  the making charge they pay to jewellery
  manufacturers and revenue generated from
  jewellery sales rather than the underlying price
  of gold Bullion.
• It is crucial for physical merchants to minimise
  their exposure to the inherent speculative
  elements of the international gold market so that
  they can ensure their business remains healthy in
  all market conditions and is not hurt by
  excessive volatility in the international gold
  price caused by factors completely outside of
  their control.

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How to Hedge?

• Options available

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Types of Hedging

• LONG HEDGE
• Buying a futures contract to lock-in input price
  of raw material .
• Participants
• A user who has fixed the selling price of the
  finished goods in the physical market
• SHORT HEDGE
• Selling a futures contract to lock-in the sale
  price of raw material finished goods .
• Participants
• A user who has not fixed the selling price of the
  finished goods in the physical market
• PARTICIPANTS
• Corporate (jewelry manufacturers)
• Domestic
• Exporter

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Illustration-Price is fixed

• 7th December A jeweller receives an order of 5
  Kg Gold ornament with order price fixed_at_ Rs.
  10200/10 gms.
• 15th December Needs to purchase gold to make
  jewellery
• 30th December Deliver the jewellery to the
  client
• Solution
• 7th December Buy 5 gold contracts in MCX after
  confirming the price with the client.
• 15th December Sell 5 gold contracts in MCX
  immediately buy physical gold of 5 Kg
• Example-
• 7th December
• Sold to client _at_ Rs. 10200/10 gms
• Buy in MCX _at_ Rs. 10300/10 gms (February
  contract)
• 15th December

Scenario 1 Future price falls to Rs. 10180 /10
gms Spot price falls to Rs. 10100/10 gms
Scenario 2 Future price rises to Rs. 10450 /10
gms Spot price rises to Rs.
10320/10 gms
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Illustration- Price is not fixed

• 1st March A jeweller receives an order of 5 Kg
  Gold ornament with order price not fixed.
• 10th March Needs to purchase gold to make
  jewellery
• 25th March Deliver the jewellery to the client
• Solution
• 10th March Sell 5 gold contracts in MCX buy
  physical gold of 5 Kg
• 25th March (Date when client fixes the gold
  price) - Buy 5 gold contracts in MCX immediately
  after confirming the price with the client
• Example-
• 10th March Buy physical gold of 5 Kg _at_ Rs.
  9500/10 gms
• Sell 5 gold contracts in MCX _at_ Rs 9650/10 gms
  (April Contract)
• 25th March -

Scenario 2 Future price rises to Rs. 9800 /10
gms Spot price rises to
Rs. 9650/10 gms
Scenario 1 Future price falls to Rs. 9400/10
gms Spot price falls to 9250/10 gms
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Advantages

• Efficient use of capital
• Lock in of prices
• Protection of profit margins
• Hedging of Inventory
• Lower impact costs
• Accessible to all participants of physical
  bullion
• High correlation with International Bullion
  prices
• Better Inventory Management (Just-in-Time)
• Better Planning Cost Management (Long Term)

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Trading months at MCX
GOLD

• FEBRUARY
• APRIL
• JUNE
• AUGUST
• OCTOBER
• DECEMBER

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Contract Specifications - Gold
GOLD
GOLD REGULAR
GOLD GUINEA
GOLD MINI
Quote-8 gms Lot Size 8 gms /- Rs.1/Tick
Quote-10 gms Lot Size 100 gms /- Rs.10/Tick
Quote-10 gms Lot Size 1 Kg /- Rs.100/Tick
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Contd.
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Contract Specifications GOLD Guinea (8gms)
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Group 4 Vaulting Charges
No Vaulting charges for Gold Guinea till 31st
December 2008
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International -MCX Correlation
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International -MCX Correlation
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Thank You
MCX is Indias No. 1 commodity exchange. Source
FMC website (www.fmc.gov.in) based on turnover in
terms of value for FY 07 Disclaimer Multi
Commodity Exchange of India Limited proposes,
subject to receipt of requisite approvals, market
conditions and other considerations, to make an
initial public offer of its equity shares and has
filed a draft red herring prospectus (DRHP)
with the Securities and Exchange Board of India
(SEBI). The DRHP is available on SEBI website
at www.sebi.gov.in as well as on the websites of
the book running lead managers at www.dspml.com,
www.citibank.co.in , www.jmfinancial.in,
www.kotak.com and www.enam.com. Investors should
note that investment in equity shares involves a
high degree of risk and for details relating to
the same, see the section titled Risk Factors
of the aforementioned offer document.