Page 27 - Bullion World issue 2
P. 27

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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