Hedge Using Derivatives: A Magic Key For Manufactures Of Stainless Steel

To build ability of risk management based on hedge using derivatives is an important subject for all manufactures of stainless steel in China because of the severe situation of the industry. The paper is trying to demonstrate the necessity of hedge and characteristics of different hedge strategies. The whole paper can be divided into four parts.In the first part, industry background is introduced as well as some tools used in the research, including London Metal Exchange(LME) and its Nickel(Ni) future and option contracts, important price indices of stainless steel in China and abroad.In the second part, the necessity of hedge is analyzed by building models according to manufacturers' process of sourcing, producing and selling and using historical data to test profit risk in different scenarios.In the third part, characteristics and effects of different hedge strategies are researched using models and historical data. Suggestions are offered on control of basis risk and comparison of different strategies.Manufacturers of stainless steel listed in China A stock market are analyzed in the fourth part. It is found that there were no hedge strategy in those companies and their gross profit ratio fluctuated according to the change of material and product price in the past several years. Building of hedge strategy is strongly recommended at the end of the paper.