Page 22 - Bullion World issue 2

Bullion World | Issue 02 | June 2021
CASE STUDY 1 - HEDGING GOLD AGAINST THE RISK
A look at the table above shows the
annualized volatility for near month OF RISING PRICES USING OPTIONS
Comex futures. A major importer/trader
who imports around 100 crores of gold
would face a price risk of around 22 Scenario: hedges the entire 2 kg requirement and
crores while for silver the volatility would A branded Gold Jeweller has received hence buys 200 contracts at an outlay of
be even higher at 47 crores in 2020. As a an order for 2 kgs of gold jewellery in 100,000 rupees.
result, hedging the above volatility would the first week of Oct 2021. Spot price
have a material impact on the business for Gold on May 27 was 48690 rupees At the time of the physical gold purchase
profitability. per 10 grams. The price for new order is in September 2021, spot gold prices
based current spot price. have risen to 51900 rupees per 10
In order to hedge the overseas grams.
price volatility impact on domestic The Jeweller will purchase gold bars
prices, domestic bullion supply towards end of September 2021. The The net receivables on options position
chain participants need to consider price risk faced by the Jeweller is the for jeweller are as follows: Spot price:
instruments, liquidity, price visibility of possibility that gold prices rise beyond 51900- Call option strike price: 48700 –
such derivative instruments, tenure, 48690 rupees level at the time of option premium paid: 500 = 2700 rupees
margin requirements and counter physical Gold purchase. per 10 grams.
party risk. Futures and options traded
on exchanges such as MCX (which To hedge this risk, the jeweller buys For 200 contracts this works out to
dominates the metals and energy Gold call options expiring on Sept 24, 540,000 rupees and the amount by
derivatives market) in the country offer 2021. He buys call option at the 48700 which the jeweller cuts his price risk as
all of above requirements. MCX gold and strike quoting at a premium of 500 he buys gold in spot market at a much
silver futures and options also offer a rupees per 10 grams. The Jeweller higher level than that in May 2021.
hedge against the currency movement
(USD/INR), import duty, prevailing
discount and premium as these
instruments are prices in Indian rupees.

MCX gold and silver options offer greater
comfort for those participants among
who have limited budget for managing
hedging in form of provision for margins.
Option offers the buyer a right but not
the obligation to purchase an underlying
asset for an upfront payment of a small
premium to the option seller/writer. A
call option buyer aims to hedge against
the risk of rising prices and a put option
buyer against falling prices.

Let us consider few case studies in which
bullion options are used to manage price
risk.

" Option offers the buyer a right but not the

obligation to purchase an underlying asset for an
upfront payment of a small premium to the option
seller/writer. A call option buyer aims to hedge
against the risk of rising prices and a put option buyer
"
against falling prices.

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