Wool exporting and risk management Mr Michael Blake Elders/BWK Ltd - PowerPoint PPT Presentation

Wool exporting and risk management Mr Michael Blake Elders/BWK Ltd

1. Introduction Exporting, Documentation and Risk Management q Risks in ‘exporting wool’ are carried by the exporter v Financial capacity v Specifications v Logistics v Risk q Wool preparation for shipment q Documentation and logistics q Risk management

2. Preparation for shipment – certification and documentation § Initiate sale – ‘ liquidate long ’ or ‘ go short ’ § Prepare wool for shipment § Delivery to port § Pre-shipment documents and certification

3. Methods of payment – export documents § Letters of credit (L/Cs) § Open account – TT, DP sight DA term § Export documents – invoice, insurance, bill of lading § Negotiation

4. Exporting options § ‘ Fixed ’ or ‘ floating ’ ? – Fixed § AUD, USD, Euro, Yen? – AUD and USD § EXW, FOB, CIF, DPP – CIF

5. Risk management § Always undertaking risk when trading wool § Identify the risks § price risk § basis risk § counter-party risk § organisational risk

5.2 Price risk § Positional situation in the market § Long = bought position, rising prices are favourable § Short = sold position, falling prices are favourable § Desired price risk needs to be targeted

5.2 Price Risk § 21um price variation & volatility AWEX MPG 21 ACOF(LHS) + AWEX 21um MPG 21day Volatility (RHS) 1998-2006 21um Volatility 21 MPG 1,400 200% 1,375 1,350 190% 1,325 1,300 1,275 180% 1,250 1,225 1,200 170% 1,175 1,150 1,125 160% 1,100 1,075 1,050 150% 1,025 1,000 140% 975 950 925 130% 900 875 850 120% 825 800 775 110% 750 725 700 100% 675 650 90% 625 600 575 80% 550 525 500 70% 475 450 425 60% 400 375 350 50% 325 300 40% 275 250 225 30% 200 175 150 20% 125 100 75 10% 50 25 0 0% Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06

5.2 Basis risk § Bought and sold positions that are not matching. § Positions differ by: § Quality, micron and/or type § Time

5.2 Basis risk: type § Bought and sold the same micron, but the quality, or ‘ type ’ differs § 21um example: § China type 30 nkt 70% Scd yld vs § Indian/Euro type 3537nkt 70% SchD yld § Difference after yield

900 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Apr-06 Feb-06 Dec-05 Oct-05 Aug-05 Jun-05 Apr-05 § Bought and sold the same type, but the micron Feb-05 Dec-04 Oct-04 Aug-04 Jun-04 Apr-04 18 vs 19 AWEX MPG in AUD c/kg Clean 1998 - 2006 Feb-04 Dec-03 Oct-03 differs: 19 vs 21 and 18 vs 19 eg.s Aug-03 Jun-03 Apr-03 5.2 Basis risk: micron Feb-03 Dec-02 Oct-02 Aug-02 Jun-02 Apr-02 Feb-02 Dec-01 Oct-01 Aug-01 Jun-01 Apr-01 Feb-01 Dec-00 Oct-00 Aug-00 Jun-00 Apr-00 Feb-00 Dec-99 Oct-99 Aug-99 Jun-99 Apr-99 Feb-99 Dec-98 Oct-98 Aug-98

5.2 Basis risk: time § Bought and sold the same type, but – the time value differs: § bought (long) stock in the spot cash market § or long/short physical or cash settlement in the forward market § Structure of forward price ‘ curve ’ affects position and profitability

5.2 Measuring price risk § What amount of $ risk exposure does the trader want? § The $ risk needs to be measured: § scenario testing, best/worst – risk/reward etc. § VAR: Volatility, time and liquidity values are ‘ stress ’ tested § $ Risk needs to be matched to trader ’ s ‘ propensity ’

5.2 Managing price and basis risk § Target ‘ desired ’ price and basis positions § Avoid inadvertently inherited ‘ overbought and ‘ oversold ’ positions § Effectively structure trades within the position (book) § Efficiently and accurately report the position Wool Position Time Micron Type Spot Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 19um MF4 India 200 -100 100 MF5 China -50 -50 Futures 50 50 200 -100 0 0 0 0 0 0 0 0 0 0 0 100 Micron Type Spot Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 21um MF4 India 50 -250 -200 MF5 China 0 Futures 0 50 -250 0 0 0 0 0 0 0 0 0 0 0 -200 Total (ALL) 250 -350 0 0 0 0 0 0 0 0 0 0 0 -100

5.2 Pricing points (execution options) in the wool market § Spot (cash) markets: § Physical buying/selling in auction or ex-auction markets § Forward markets § Forward physical buying or selling on a domestic or (usually) export basis § Derivatives: § SFE – 19, 21, 23 futures and options § ASX – 19.5, 21, 22.6 futures (China types) § over-the-counter (OTC) products, swaps and basis products

5.3 Counterparty risk § Client credit risk: § risk of non-payment by the buyer § Major risk for the Australian exporter § Manage via: § information § limit application and diversification § minimise ‘ time ’ exposure § maximise confidence in contract and export terms

5.4 Other risks § Organisational: § inadequate human resource § inadequate financial resources § Supply and demand risks: § inability to delivery contracted quantity or quality § global demand shocks § conveyed by price and liquidity § Asian crisis, SARS, bird flu

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