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Hedging Metal Prices

The Principles of Hedging

The LME offers those at all stages of the metals supply chain the opportunity to hedge their price risk and gain protection from adverse price movements.

Hedging is the process of offsetting the risk of price movements in the physical market by locking in a price for the same commodity in the futures market.

There are two main motivations for a company to hedge:

  • To lock in a future price which is attractive, relative to an organisation’s costs
  • To secure a price fixed against an external contract

 

When hedging, an organisation starts with price risk exposure from its physical operations, and will buy or sell a futures contract to offset that price exposure in the futures market. An organisation can decide on the amount of risk it is prepared to accept. It may wish to eliminate price risk entirely.

 Click to learn more about Hedging 

 

Speculation

Hedging is the opposite of speculation as its primary purpose is to offset risk. Speculators, however, come to the futures market with no initial risk. They assume risk by taking on futures positions, which in turn provides market liquidity. Hedgers reduce or eliminate the chance of future losses or profits, while speculators risk losses in order to make profits.

LME Hedging Programme

To be successful, a hedging programme must be devised in conjunction with a sale or purchase plan, and all pricing must be based on the LME Official Settlement Price in order to achieve the most effective hedge and to meet the international accounting standards.

The programme can be as simple or as complex as a company wants to make it, but it will depend on that company’s appetite for risk, internal practices, pricing policies and hedging motives. Not only must a LME hedging programme be well devised, but it must also be managed according to the changing circumstances of a company’s physical operations.

Video content has been provided courtesy of the London Metal Exchange



8 Good Reasons Traders Use Berkeley For Trading On The LME

Online Trading

Online LME access via all of the leading trading platforms including TT, Patsystems, CQG and FFastfill. All online customers have the telephone back up of a dedicated LME trading team contact us.

Mobile Trading Application

Mobile LME access by leading trading platforms available for trading on iPhone, iPad and Android devices. For a free demo click here.

Dedicated LME Trading Desk

Access to our LME dealing desk by Reuters or Bloomberg Messenger, email or phone who will use multiple sources to obtain the best rates for outrights, trading carries or broken dates. For more information contact us.

Margin Finance for LME Arbitrage Traders

For LME/CME Copper arbitrage we offer margin financing from just 13% of the total initial margin. Berkeley understands the need for low margin finance costs, speed of execution and the ability to immediately hedge any currency risk exposure immediately. For more information contact us.

Independence

As a category 4 member, we can trade freely with any other member which provides clients with access to a deep liquidity pool. This liquidity is sourced across several market makers as opposed to trading solely with a single provider.

LME Options

Berkeley offer very keen pricing on both buying or writing of options due to our ability to independently source pricing from multiple providers. In addition we can run standardized portfolio analysis of risk (SPAN) margin scenarios to optimize funding requirements. For more information contact us.

Clearing Give-In and Give-Up Services Available

Flexible clearing arrangements are offered across major exchanges whether give-in or give-up services are required.

Regulated by the FCA and Members of the LME

As a firm, authorised and regulated by the Financial Conduct Authority (FCA), we segregate all client money held for the purposes of trading LME products and provide Registered LME Client Contracts to all customers.