On April 22, at the CCIE-2025SMM (20th) Copper Industry Conference and Copper Industry Expo - Copper Industry Innovation Forum, co-hosted by SMM Information & Technology Co., Ltd., SMM Metal Trading Center, and Shandong Aisi Information Technology Co., Ltd., with Jiangxi Copper Corporation and Yingtan Land Port Holding Co., Ltd. as the main sponsors, Shandong Humon Smelting Co., Ltd. as the special co-sponsor, and Xinhuang Group and Zhongtiaoshan Nonferrous Metals Group Co., Ltd. as co-sponsors, , Weng Zhantu, head of the Marketing and Product Department of the Derivatives Division of Jinrui Futures Co., Ltd., shared insights on how over-the-counter derivatives can promote high-quality development in the copper industry.
Overview of Over-the-Counter Derivatives Business
Growth in Notional Principal of Over-the-Counter Derivatives Business of Risk Management Subsidiaries
Over-the-Counter Derivatives Business in the Nonferrous Metals Sector (Market Share)
(Data Source: China Futures Market Monitoring Center)
Development of Copper On-Exchange Futures and Options
In 2024, the daily average open interest of SHFE copper futures was 389,900 lots, with a cumulative trading volume of 50.8647 million lots; the daily average open interest of SHFE copper options was 58,000 lots, with a cumulative trading volume of 23.2471 million lots.
Enhancing Industry Risk Management Capabilities
Enhancing Industry Risk Management Capabilities - Buy Insurance Strategy (Buying Options)
• Enterprise Demand: On March 29, 2024, after a copper processing enterprise priced its raw material procurement, downstream customers did not fix the price due to rising prices, resulting in an unhedged exposure of 1,000 mt. According to the company's policy, strict hedging was required, but the enterprise believed that the market was likely to continue rising. They sought a better way to comply with the strict hedging policy while still benefiting from the rise in copper prices.
• Traditional Operation: Hedging with a short futures position on the 05 contract at 72,500, requiring an initial futures margin of 6.525 million yuan.
• Hedging Optimization: Purchasing 1,000 mt of at-the-money put options on CU2405 from Jinrui Capital, with an entry price of 72,500, a strike price of 72,500, and an expiration date of April 30, paying a total premium of 1.015 million yuan.
• Option Strategy - Buy Insurance (Buying Options)
On March 29, 2024: The enterprise purchased 1,000 mt of at-the-money put options on CU2405 from Jinrui Capital, with an entry price of 72,500, a strike price of 72,500, and an expiration date of April 30. The initial premium paid was 1,015 yuan/mt, with a premium rate of approximately 1.40%, totaling 1.015 million yuan initially.
April 30, 2024: The closing price of CU2405 was 82,340 yuan/mt, with the options not exercised. The loss at expiration was equal to the initial premium of 1,015 yuan/mt.
In a sharply rising market, buying put options for short hedging means that, on one hand, after paying an initial 1.015 million yuan, there is no need for additional margin calls; on the other hand, the inventory at expiration is sold at 82,340 yuan/mt. Combining futures and spot, the enterprise's earnings increase by 8,825 yuan/mt, totaling 8.825 million yuan, effectively capturing the benefits of rising spot prices.
• Advantages of buying OTC options:
Compared with futures hedging, it can avoid margin calls in a volatile market and effectively capture the benefits of rising spot prices.
Compared with exchange-traded options, it allows for flexible selection of strike prices and expiration dates.
Enhancing Industrial Risk Management Capabilities - Income-Enhancing Strategies (Selling Options)
• Enterprise Needs: On November 26, 2024, copper prices were quoted at around 74,300 yuan. A wire and cable enterprise, based on its business plan and market expectations, planned to establish a raw material inventory reserve. It intended to purchase 1,000 mt at a copper price of around 73,000 yuan and 2,000 mt at around 72,000 yuan through fixed-price procurement.
• Traditional Operations: The enterprise placed daily orders for 1,000 mt of long positions in 73,000 futures on the futures market, waiting for execution.
► Option Strategy - Income Enhancement (Selling Options)
November 26, 2024: The cable enterprise chose to sell 1,000 mt of out-of-the-money put options with CU2501 as the underlying asset, with an entry price of 74,000, a strike price of 73,000, an expiration date of December 25, a premium of 600 yuan/mt, and a margin of 4,012 yuan/mt, totaling an initial 4.012 million yuan.
December 25, 2024: The closing price of CU2501 was 74,140 yuan/mt, with the options not exercised. The enterprise received a premium of 600 yuan/mt at expiration, totaling 600,000 yuan.
Upon the expiration of the options, as CU2501 never fell below 73,000 during the period, the enterprise did not purchase additional inventory but still achieved an income increase of 600,000 yuan through selling the options.
• Summary of Scenarios for Selling Options:
The enterprise has a clear strategic inventory purchase price (or strategic hedging selling price); within the scope of risk appetite, as long as the market logic remains unchanged, continuous rolling operations can be conducted.
► Summary of Characteristics of OTC Options and Exchange-Traded Options:
Enhancing Industrial Risk Management Capabilities - Accumulation Structures
It lists relevant cases and summarizes the advantages of knock-out enhanced accumulation options: the opportunity to obtain a better position-building price than the entry price; if the price is volatile enough to trigger a knock-out and terminate the option, although the enterprise can no longer continue to acquire long positions at a lower price, it will receive a one-time position for the remaining tonnage at the entry price, which is at least the same as the cost of direct futures position-building and meets the initial hedging quantity.
International Development of the Service Industry
International Development of the Service Industry - Exporter's Overseas Market Hedging Strategy
It lists and summarizes relevant cases of the international development of the service industry - exporter's overseas market hedging strategy.
Overseas Commodity Return Swaps: Products linked to commodity futures in overseas markets are traded and settled in RMB domestically.
Business Advantages: More convenient settlement in RMB, improving transaction efficiency;
Trading Varieties: LME metals, COMEX copper and precious metals, SGX iron ore, ICE cotton, and energy products, etc.;
Note: Specific varieties, transaction limits, etc., are subject to actual inquiries.
In addition, it also lists and summarizes relevant cases of the international development of the service industry - importer's price ratio locking strategy.
Discussion on Optimizing Industrial Financing Models
The integration of warrant service business and OTC derivatives business of risk management subsidiaries can provide industrial clients with richer spot financing models.
For example: To meet the financing needs of industrial clients for spot purchases, risk management subsidiaries can provide zero-interest warrant service business.
