SMM10 March 27: at the 2020 China International Silver Industry chain Summit Forum and China Silver Market Application Symposium, Hongyuan Futures Precious Metals researcher Li Xiaojie brought a speech on "the Application of Financial instruments in Silver Enterprise risk Management".
The necessity of risk management
Li Xiaojie pointed out that precious metal assets are volatile, such as gold volatility and silver volatility. He believes that high volatility will be the norm for some time to come, so it is necessary to carry out risk management. And the metal price trend has a cyclical nature, in the current cycle, the epidemic situation, the expected speed of economic recovery and other factors will affect the price of precious metals. There are mainly the following situations:
Situation 1: the second or third full outbreak of the epidemic, the global economy deteriorated again, monetary or fiscal stimulus increased, a new round of rise; case 2: vaccine progress, but the second or third epidemic continues to ferment locally, the global economic recovery is weak, loose expectations are maintained, wide shocks, the overall is still on the strong side; Scenario 3: the vaccine is effective, the epidemic has not fermented again, the global economy is slow to recover, loose expectations are maintained, and wide shocks are maintained; scenario 4: the vaccine is effective, the epidemic is effectively controlled, the global economic recovery is stronger than expected, easing is maintained but expectations are weakened, and gold prices fall.
Financial instruments are risky in themselves.
Li Xiaojie said that financial instruments themselves are risky, and there are risks in futures, put options, arbitrage and buy options. For example, the price fluctuates violently, the margin is added, the falling limit board or the transaction is not active near the delivery month, and so on.
Risk Management: the balance of risk and return
The auxiliary tools for business development using financial instruments such as futures and options have at least the following effects and functions:
1. Maintain the value of the inventory and determine the sales profit. For the inventory that has been purchased, sell through futures, lock the sales price, and determine the sales profit.
2. Increase the purchasing channels of enterprises. In some specific cases, futures can be another channel for enterprises to purchase, and when the goods enter the delivery link, the real transfer of the real right of goods can be realized, which is an appropriate supplement to spot procurement.
3. Adjust the inventory. When it is considered that the current raw material price is reasonable and needs to increase inventory, futures can be used instead of spot inventory, and the leverage principle can be used to improve the utilization rate of enterprise funds and ensure the cash flow of enterprises.
4. Stabilize the operating budget of the enterprise and smooth the fluctuation curve of enterprise profit. Annual procurement and sales can be controlled as a whole, avoid strong fluctuations in operating profits, and promote the stable and sustainable development of enterprises.
In order to hedge the risk, we can choose financial derivatives such as futures / forwards. For example, we can sell put options to reduce procurement costs, sell call options to reduce inventory costs, buy call options to lock in the risk of rising raw materials, buy put options to lock in the risk of product sales, and so on.
Improve your position: professional people do professional things
Finally, Li Xiaojie said that to reduce corporate financial risks, all departments need to perform their own duties, professional people to do professional things. The futures trading team of the enterprise writes the futures plan by understanding the sales situation of the sales department and the procurement situation of the procurement department, and then submit it to the decision-making committee for approval, and finally form a feasible plan to implement.
In addition, enterprises should also consider several questions related to their operation: 1. Do strategists really understand the nature of financial instruments? 2. Have strategists experienced a complete cycle of silver price ups and downs? 3. Do you set up a database belonging to the enterprise itself and rely on the data to make decisions?
