Risk Warning: Financial trading in a leveraged product may result in losses that exceed your initial deposit. Leveraged trading is not suitable for everyone, so please ensure that you fully understand the risks involved prior to trading.
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:
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.
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.
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
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.
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.
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.
Flexible clearing arrangements are offered across major exchanges whether give-in or give-up services are required.