Page 27 - Bullion World issue 2

Bullion World | Issue 02 | June 2021
CASE STUDY 2 - HEDGING SILVER AGAINST THE RISK
OF FALLING PRICES USING OPTIONS:

Scenario:
A major silver jewellery and articles At the time of jewellery and silver articles
manufacturer is expecting a sharp sale in Oct, spot prices have fallen to
pickup in retail demand before Diwali 68200 rupees per kg.
in October 2021. The manufacturer
of jewellery and silver articles has The net receivable on option position
already purchased the silver required for the manufacturer is as follows: Strike
as a raw material (150 kgs) to start the price of put option: 70500 rupees – spot
manufacturing. Spot price for silver price in Oct: 68200- premium paid on
on May 27 was at 70582 rupees per put option purchase: 500 = 1800 rupees
kilogram. per kg.

As the jeweller already posses silver For five contracts this works out to
inventory, the risk faced here is that of 270,000 rupees, the amount by which
falling prices at the time of sale of final the manufacturer has cut his price risk
The best time to buy a product, during October 2021. on raw material.
CombiBarTM was 10 years ago. To hedge this risk, the jeweller buys a As seen in the above case studies, the

The second best time is now. put option at the 70500 strike quoting bullion market intermediaries are able
at a premium of 500 rupees per kg and to cut back on the risk of an adverse
expiring on 24 Nov 2021. Hence he price move with the use of options in the
hedges the entire 150 kgs of silver used hedging process.
as a raw material and purchases 5 put
options at an outlay at 75,000 rupees.

Ms Ashwini Bansod has worked in In-
dian commodities derivatives market
for over 16 years. She helped setup
India’s first dedicated commodities
newswire (Newswire 18, formerly a
part of CNBC TV 18), before starting
out as a commodities research analyst
with PhillipCapital India (erstwhile Refco
/ MF Global) in 2005. Since then she
has covered agri-commodities, metals
and currencies as a research analyst.
Currently, she heads the commodities
research desk and is engaged in help-
ing the clients with risk assessment
and management through commodity
derivatives.

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