Metals Price Risk Management: Use Cases
Why Active Management?
Back in June, CIH welcomed prospects to our Chicago Office for our 2nd Metals Price Management Seminar. Attendees were introduced to Price Risk Management, Core Option Strategies, and Position Management over time. After a few hours spent introducing different concepts, we completed a pricing simulation where participants could try out both futures and options to see how their hypothetical net price would react to market changes.
The second morning’s curriculum covered more complex and in-depth option strategy. After a day and a half of CPE accredited instruction, our guests put their new knowledge to the test- the group split up into three teams and managed a hypothetical position in a real market from a previous, unknown, futures contract (above).
In the end, two of three groups were able to achieve higher gross margin results versus the open market (CIH Instructor Michael Liautaud). With each “decision period”, the groups discussed adding to or altering their hedges to capitalize on market movements and new data they were supplied with.
CIH is hosting another Metals Price Risk Seminar on December 5th and 6th in Chicago. Regardless of experience, if you are interested in learning more about futures and options in your business, this event is a great way to expand your knowledge. Contact Logan Davis with any questions or comments.
Metals Price Management Seminar Review
“I would recommend this class to anyone.”
“CIH provided a comprehensive class for all, regardless of their experience or knowledge.”
“They exceeded my expectations by creating an engaging atmosphere, including a hands-on simulation, that sparked questions and conversations that were eye-opening.”
“The class ultimately gave our supporting staff from all departments a deeper understanding of our everyday business transactions and overall business model.”
“CIH truly cares about our business needs and our understanding of the strategies available to hedgers.”
Trading futures and options carries a risk of loss. Past performance is not indicative of future results. Testimonials are not indicative of future success. Individuals providing testimonials were not compensated.
Applied Use Cases
Large Price Swings
Recent years have brought incredible volatility to the copper market. As unanticipated events like the US/China Trade War, COVID-19, Supply Chain Disruptions, and the War in Ukraine, many business operations have struggled to manage the uncertainty of the future. Through CIH’s educational and process driven approach to price risk management, your company can be better prepared for what comes next.
Gain Market Share
Pressured global supply chains can wreak havoc on businesses at all levels. As the world began reopening after lockdowns, overcoming production backlogs and detangling the logistical mess was a very tall task. We still see ripple effects today. Many companies responded by increasing order volume and quantity out of fear for the next opportunity to receive product. Carrying that inventory increases a company’s exposure to price risk and macro factors around the world. CIH’s dynamic technology allows companies to stress test their position for capital requirements, create what-if scenarios to evaluate implications of various market moves, and ultimately feel more comfortable carrying large inventories in order to produce reliably for their customers.
Larger Forward Sales Book
As world economies recovered from pandemic demand destruction, business began to boom. Instead of selling a couple months out and buying the copper when the sale was made, sales began pushing several months/years out. This increased a company’s price risk that if copper rose substantially by the time they could make the product, margins on the sale would be pressured. For prices fixed at time of sale, CIH works with clients to identify when they will need to buy the copper to fill that order. Each week, companies work with their consultant to manage those positions in order to achieve their margin goals.
Managing Value of Inventory
Not all inventory is created equal. Having a detailed accounting of all inventories on hand, as well as a comprehensive time-based records of forward sales, will allow a company to match inventory to sales more accurately and efficiently. Through CIH’s Daily Position Report, these details can be easily uploaded to a client’s custom website. Once the data is collected, our customers can analyze their net price risk based on work in process and raw material inventories. That net price risk can be viewed through time alongside the sales schedule, giving clients additional flexibility in managing their risk.
Customer Pricing Requests
Even if a company doesn’t normally offer a fixed price at the time of sale, due to the price volatility over the past year, some clients are asking for a fixed price or at least a cap on price. In those cases, CIH works with customers to identify strikes and prices of call options that would offer a cap on price to customers. The company could either embed this cost in the markup or add it as an extra fee that the customer could choose to take or leave. For example, with copper now approaching $4.00/pound again, some clients are considering buying something like a $4.10 call to put a cap on price yet leave the down side open. In July, a $4.10 call would cost about 24 cents. You could charge the $0.25 to offer a cap at $4.10 copper or mark up the price a bit an offer them a $4.40 max and potentially keep the savings on the copper if the price dropped.