COFCO Futures: Flexible use of options to ensure the smooth operation of cotton-related companies
On January 28, 2019, with the sound of a gong, cotton options were officially listed on the Zhengzhou Commercial Exchange. After cotton futures, there are new tools for risk management of cotton-related enterprises. As the earliest subsidiary of COFCO Group involved in futures business in China, COFCO Futures has taken root in the industrial chain for many years, served industrial enterprises, and actively guided industrial customers to rationally use derivatives such as futures options.
Cleverly combine option strategies to achieve hedging goals
Company A is a leading domestic large-scale cotton trade enterprise. Its business scope covers cotton purchase and sales, cotton importexport, as well as cotton planting, processing, warehousing, logistics and other aspects of the industrial chain. Regarding the listing of cotton options, the person in charge of the futures department of Company A said: “The listing of cotton options is of great significance to cotton-related companies and the entire industry. It enriches the hedging tool system of cotton-related companies and realizes corporate risk management. The diversity of strategies meets the refined risk control needs of some companies. In a complex and ever-changing market background, companies need to strictly implement risk management plans and requirements when using futures and options tools to hedge risks. In short, the listing of cotton options It provides new ideas and new ways for the stable operation of our cotton-related enterprises and the optimization and upgrading of business models.”
A certain cotton ginning enterprise in Xinjiang is a cooperative enterprise of Enterprise A. The ginning factory sells cotton to Enterprise A or other enterprises according to its own operating arrangements. Due to the large purchase volume of the ginner’s operation, some seed cotton has not yet been processed before the Spring Festival of 2020. After the Spring Festival of 2020, the COVID-19 epidemic spread in China. Affected by this, spot prices fell sharply. The main cotton futures contract CF2005 fell from 14,070 yuan/ton on January 2 to 12,260 yuan/ton at the end of February. A ginning factory faced Great sales risk.
As a partner, Company A helps the ginner operate on both the spot and options sides: First, it assists the ginner in realizing spot sales of cotton by participating in the reserve cotton auction; secondly, it uses the cotton option portfolio to lock in processing costs as much as possible, and Preserve profitability in the event of future price increases. Specifically, Company A formulated an option portfolio strategy for the cotton ginning mill of buying put options and selling call options at the same time. If the price rises in the later period, you can realize sales profits by participating in delivery after the call option expires. If the price falls in the later period, you can proactively exercise the put option to lock in part of the processing costs to effectively control losses.
Considering that the comprehensive cost of the ginning mill lint is about 12,400 yuan/ton, after the market opened on March 12, Company A offered this customer a price of 310 yuan/ton. Buy 120 lots of CF2005P12200 contract options (discounted spot size of 600 tons), and sell CF2005C12800 contract options at a price of 135 yuan/ton; on April 3, the cotton futures price fell below the exercise price, so the CF2005P12200 contract options expired. Quan obtained 120 lots of CF2005 contracts, with a position opening price of 12,200 yuan/ton; on April 7, Company A closed the futures contract at a price of 10,850 yuan/ton, and the ginning factory sold spot goods at a price of 11,250 yuan/ton that day.
Specifically, the cost of this option combination strategy is 175 yuan/ton (310 yuan/ton 35 yuan/ton), and the futures closing profit is 1,350 yuan/ton (12,200 yuan/ton-10,850 yuan/ton). The spot sales loss was 1,150 yuan/ton (12,400 yuan/ton – 11,250 yuan/ton). This combination strategy successfully helped A ginning company to hedge risks when cotton prices fell sharply and achieve a profit of 25 yuan/ton. In the process of spot operations, companies use option tools to not only avoid the risk of price declines, but also retain potential profits when prices rise in the future, which plays a positive role in stabilizing corporate production and operations.
Using call option selling to help enterprises reduce costs and increase efficiency
Since the second half of 2020, the domestic epidemic has gradually been brought under control, cotton consumption has begun to recover, and cotton futures spot prices have shown an upward trend. However, entering January 2021, the new crown epidemic has rebounded in many places in China, and overseas epidemics have continued to spread. In addition, the U.S. Customs and Border Protection has issued an upgraded ban on Xinjiang cotton. The market is worried that cotton consumption will be affected. Zheng Cotton Futures Contract CF2105 climbed to 15610 yuan/ton and then fell back.
In view of the judgment of spot fundamentals, the company decided to use the strategy of selling out-of-the-money call options to reduce holding costs.
The details are as follows: On January 21, 2021, 2,000 tons of cotton spot was purchased at 15,450 yuan/ton; on January 22, the out-of-the-money call option on the CF2105C16000 contract was sold at an average price of 395 yuan/ton; on April 6, When the call option expires, the settlement price of Zheng cotton contract CF2105 is 14,930 yuan/ton, which is far lower than the exercise price of 16,000 yuan/ton, and the full premium income is 395 yuan/ton.
Through this option selling operation, Company A effectively reduced the spot holding cost by 395 yuan/ton during the three-month cotton spot holding period, which was a significant reduction compared to the bare spot position without options. This synergistic effect.
Improve the ability to use the derivatives market to manage risks
The listing of cotton options has enriched the hedging model of cotton companies and brought new opportunities for the business development of cotton-related companies. After many cotton options operations, the person in charge of the futures department of Company A was deeply touched and said Its successful options hedgingThe valuable experience is shared as follows:
First, we must base ourselves on solid market research. The success of hedging strategies such as futures options cannot be separated from solid research work. The company attaches great importance to market research and realizes that it must deeply track the futures and spot markets and establish a fast and effective decision-making and operation mechanism; before making strategic decisions, it must hold market seminars to summarize domestic and foreign market conditions and conduct analysis on subsequent trends. Discussion and judgment are the premise and basis for formulating a reasonable and efficient option hedging strategy.
The second is to overall coordinate the company’s futures and spot positions, strictly implement the hedging plan, and ensure the coordination and synchronization of futures option transactions and spot business. Companies should strengthen internal risk control and implement hedging strategies in strict accordance with risk management requirements, so that futures options can become a powerful tool to ensure the smooth operation of enterprises.
The third is to take the initiative to learn option tools and trading strategies, and improve the ability to use derivatives to manage risks. Facing the increasingly complex domestic and foreign market situations, only using a single derivative instrument and model can no longer fully meet the business development needs of enterprises. It is necessary to actively embrace the futures and options market and gradually improve the ability to use derivatives to hedge risks, in order to contribute to the stability of enterprises. Operational escort.
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