International market risk mngt
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OCHIR CONSULTING CO., LTD.
PRESENTS
INTERNATIONAL MARKET
RISK MANAGEMENT
Ulaanbaatar 2007-Fall
2
CLASS OBJECTIVE
Introduction to market price (FX and
commodity) risks and financial derivatives
Students are expected to learn how to make
calculations on financial derivatives
Practical use of basic financial derivatives
3
MONGOLIA-BANANA REPUBLIC
Major export items
CU copper
AU gold
Cashmere
others
4
2 main ways to boost profits
Keep costs down,
Commodities price risk management
5
MINERS & DEALERS
MINERS
DEALERS
6
MINERS & DEALERS
MINERS
GEOLOGICAL
SURVEY
MINING
PRODUCTION
DEALERS
SUPPLY &
DEMAND
INTERNATIONAL
POLITICS
INTERNATIONAL
ECONOMICS
e-mail: [email protected] 7
GOLD CHART 1992-2002
8
COPPER CHART 1992-2002 MCU0, Close Monthly
Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul
USDT
1400
1600
1800
2000
2200
2400
2600
2800
3000
30Sep 1438.5030Sep 1438.50
9
GOLD CHART 1997-2002
10
COPPER CHART 1997-2002 MCU0, Close Weekly
Sep97 Jan98 May Sep Jan99 May Sep Jan00 May Sep Jan01 May Sep Jan02 May Sep
USDT
1300
1400
1500
1600
1700
1800
1900
2000
2100
2200
2300
2400
18Oct 1497.25
11
COPPER CHART 2000/IX-02/X MCU0, Close Daily
Sep00 Oct Nov Dec Jan01 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan02 Feb Mar Apr May Jun Jul Aug Sep Oct
USDT
1300
1350
1400
1450
1500
1550
1600
1650
1700
1750
1800
1850
1900
1950
21Oct 1519.75
e-mail: [email protected] 12
GOLD CHART 2001-2002
e-mail: [email protected] 13
COPPER CHART 2001/X-02/X MCU0, Close Daily
Oct01 Nov Dec Jan02 Feb Mar Apr May Jun Jul Aug Sep Oct
USDT
1320
1340
1360
1380
1400
1420
1440
1460
1480
1500
1520
1540
1560
1580
1600
1620
1640
1660
1680
21Oct 1519.7521Oct 1519.75
e-mail: [email protected] 14
GOLD CHART YI-IX/2002
15
VI/4-VIII/1 LOST OPPORTUNITY
FOR 1 TONN OF GOLD
1 TONN= 1 000 000 gramm = 32 150,72
06.04.02 330,00$ 32 150,72 10 609 738 , 45
08.01.02 298,00$ 32 150,72 9 580 914 , 56
LOST OPPORTUNITY 1, 028, 823. 89$
16
IS COMMODITY PRICE RISK A
FORSE MAJOR?
NOT REALLY
IS THERE A WAY OF AVOIDING
COMMODITY PRICE RISK?
Y E S !
AND IT SHOULD BE HANDLED!
17
NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT NO COMMODITIES RISK MANAGEMENT
MEANS PURE BET ON ONLY PRICE INCREASES
IF THE PRICE GOES BELOW COST OF PRODUCTION THE MINE GETS CLOSED
THE BANK WHICH LENT TO THE MINER WILL BE EXPOSED TO CREDIT RISK
18
NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
BANK
REQUIREMENT
RAISES CREDIT
RATING FOR
MINERS
19
NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
Meridian's Kennedy:
* We did it (hedge) for bank loans, * two-thirds of the industry was hedged!!!
Kinross Gold Corp. CEO Robert Buchan: After the company announced in April it would not renew a hedge on 500,000 ounces of gold he got a call the next day from a bank.
Source: Reuters, 10.01.02, 6:57 PM ET
20
NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
HELPS TO ISSUE
SHARES ON STOCK
EXCHANGES
HELPS IF THE MINE
WANTS TO ISSUE
INTERNATIONAL
CORPORATE BONDS
21
IT IS TIME TO RAISE
FINANCES MAJOR INTEREST RATES ARE AT LOWEST
LEVELS RECENTLY
SINCE 1999 MONGOLIA HAS “B” CREDIT
RATING, WHICH IS NOT BAD AT ALL
MONGOLIAN COMPANIES HAVE NOW
POSSIBILITY TO GET CREDIT RATINGS &
ISSUE INTERNATIONAL CORPORATE
BONDS
22
REAL INTEREST RATE DIFFERETIALS:
WORLD VS MONGOLIA
INTEREST RATES, 12 MONTHS
LOCAL CURRENCY
INTEREST RATES IN
MONGOLIA
Annual
Inflation
(CPI)
REAL INTEREST
RATE IN
MONGOLIA
min min
2002.9.30 17,0% 3,1% 13,9%FOREIGN CURRENCY
(USD) INTEREST
RATES IN MONGOLIA
LIBOR, 12 months:
USD
INTEREST RATE
DIFFERENTIALS
min
2002.9.30 12,0% 1,7% 10,3%
23
STANDARD & POORS
Sovereign Ratings List Ratings are as of September 19, 2002 (updated weekly)
Sovereign
Long-
term
rating
Outlook
Short-
term
rating
Long-
term
rating
Outlook
Short-
term
rating
Argentina SD SD SD SD
Bulgaria BB Stable B BB- Stable B
China BBB Stable A-3
Ecuador CCC+ Stable C CCC+ Stable C
India BB+ Negative B BB Negative B
Indonesia B- Stable C CCC+ Stable C
Mongolia B Stable B B Stable B
Morocco BBB Negative A-3 BB Negative B
Pakistan B+ Stable B B- Stable B
Panama BB Stable BB Stable B
Russia BB- Stable B BB- Stable B
Senegal B+ Stable B B+ Stable B
Turkey B- Negative C B- Negative C
Ukraine B Stable B B Stable B
Uruguay B Negative B B Negative B
Venezuela B Negative B
Vietnam BB Stable B BB- Stable B
Local Currency Foreign Currency
24
ERDENET GOT “” RATING S T A N D A R D & P O O R’S
Research: Erdenet Mining Corp. Assigned First
Corporate Credit Rating In Mongolia
Publication date: 14-Mar-2002
Analyst: Peter Stephens, Melbourne, John Bailey, HK
MELBOURNE (Standard & Poor's) March 14, 2002--Standard & Poor's said today that it had assigned it’s single- ‘B’ long-term corporate credit rating to Mongolian mining company, Erdenet Mining Corp.(EMC). This is the first corporate credit rating assigned to a company in Mongolia. The rating and its importance to the Mongolian reflects the company’s 51% ownership by the Government of Mongolia (B/Positive/B) and its importance to the Mongolian economy. The outlook is stable.
25
CONDITIONS OF ERDENET
CORPORATE BOND ISSUE
MINIMUM AMOUNT = $ 50-100
INITIAL MATURITY- 3 YEARS
INT= LIBOR + COUNTRY + COMPANY
RISK RISK
INT = 2% + 2-3% + 2-3 %
INT = ( per annum ) 6-8%
* * duration of the process of road-show to final realization once the project (Bank Feasibility
Study) done - 3 months
e-mail: [email protected] 26
COMMODITIES PRICE RISK
MANAGEMENT TECHNIQUES
SPOT ORDERS
FORWARD CONTRACTS
OPTION CONTRACTS
SWAP CONTRACTS
e-mail: [email protected] 27
GOLD CHART YI-IX/2002
e-mail: [email protected] 28
FORWARD CONTRACTS
Gold is to be sold at a Price, quantity and maturity to be set on the contract date.
Unmined gold can be sold out
Forward prices are set at time of contract
Miner gets an OBLIGATION to sell
The forward sell price will be set and wont change whatever prices will be during the contract maturity or at the end of maturity
e-mail: [email protected] 29
F = S+S *dI/100*dT/ 360 F = Forward prices S = Spot prices dT = Contract maturity /in days/ dI = Difference btwn USD and Gold Interest rates /in per cent/
Forward contracts
e-mail: [email protected] 30
Class Case: Solution
S=900 USD/TOX
I(us)=LIBOR= 1.7 per annum
I(Au)= 1.0
dI= 1.7-1.0= 0.7
dT= 30
F=900+ 900*(0.7/100)*30/360
F=900.525
S 900,00 USD
LIBOR 2%
I(Au) 1%
d(T) 30
F 900,525 USD
e-mail: [email protected] 31
Forward contracts
BENEFITS
COMPLETE
INSURANSE AGST
PRICE DROPS
PROVIDES
CLEARANCE AND
STABILITY IN
FOLLOWING
BUSSINESS PLANS
COSTS
NO DIRECT COSTS ASSOCIATED
PRODUCER MAY LOSE POTENTIAL PROFIT FROM PRICE INCREASES IN CASE PRICES RISE
e-mail: [email protected] 32
GOLD CHART YI-IX/2002
e-mail: [email protected] 33
OPTION CONTRACTS
BY BUYING PUT OPTION
MINER GETS THE RIGHT TO
SELL THE COMMODITY AT
PRICE, QUANTITY, AND
MATURITY PRESET AT THE
CONTRACT DATE.
e-mail: [email protected] 34
OPTION CONTRACTS
PROFIT/LOSS ON PUT OPTION (STRIKE @ $318)
-$5
$0
$5
$10
$15
$20
295 300 305 310 315 320 325 330 335
PR
OF
IT /
L
OS
S
e-mail: [email protected] 35
OPTION CONTRACTS
BENEFITS
COMPLETE
INSURANSE AGST
PRICE DROPS
PRODUCER GETS
FULL BENEFITS
FROM PRICE
INCREASES IN CASE
PRICES RISE
COSTS
OPTION PREMIUM
e-mail: [email protected] 36
OPTION CONTRACTS OPTION-FREEDOM OF CHOISE
OPTION - FREEDOM OF CHOISE
OPTION – INSURANCE AGST
COMMODITIES PRICE DROP
e-mail: [email protected] 37
OPTION CONTRACTS
1994 - AIGI OFFERED PUT
OPTION TO ERDENET AT A
STRIKE OF $2,800 WHEN SPOT
COPPER PRICES WERE
AROUND $3,000
38
COPPER CHART 1992-2002 MCU0, Close Monthly
Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul
USDT
1400
1600
1800
2000
2200
2400
2600
2800
3000
30Sep 1438.5030Sep 1438.50
39
POTENTIAL ANNUAL PROFIT OF ERDENET
IF IT BOT PUT OPTION @ STRIKE $2,800
ANNUAL ERDENET COPPER SALES
in0.9999 of metal 120,000.00
1995.01 2,800.00$ 120,000.00 336,000,000.00$
10.01.02 1,440.00$ 120,000.00 172,800,000.00$
ANNUAL LOST OPPORTUNITY- 2002 $163,200,000.00
40
SWAP CONTRACTS
We have a swap transaction if the
commodity is sold on spot and
bought back at forward date
or bought on spot and sold out on a
forward date.
e-mail: [email protected] 41
GOLD CHART YI-IX/2002
42
SWAP TRANSACTIONS
BENEFITS
ALLOWS TO FULFILL
FINANCIAL OBLIGATIONS
IN CASE OF
UNPLEASANT PRICE
CONDITIONS
ALLOWS TO RAISE
FUNDS AT A MINIMUM
COST WHEN REQUIRED
WEAK POINTS
NO DIRECT COST
WON’T INSURE
FROM A PRICE
DROP
43
CONFRONTATION ?
“I KNOW MY JOB!” “NO LOAN!”
44
CO-OPERATION ?
45
CONCLUSION No 1
NOT REALLY IS THERE A WAY OF AVOIDING
COMMODITY PRICE RISK? Y E S ! AND IT SHOULD BE HANDLED!
IS COMMODITY PRICE RISK A
FORSE MAJOR?
46
CONCLUSION No 2
NO COMMODITIES RISK MANAGEMENT MEANS PURE BET ON ONLY PRICE INCREASES
IF THE PRICE GOES BELOW COST OF PRODUCTION THE MINE GETS CLOSED
THE BANK WHICH LEND TO THE MINER WILL BE EXPOSED TO CREDIT RISK
47
WHAT IS INT’L PRACTICE?
Meridian's Kennedy:
* We did it (hedge) for bank loans, * two-thirds of the industry was hedged!!!
Kinross Gold Corp. CEO Robert Buchan: After the company announced in April it would not renew a hedge on 500,000 ounces of gold he got a call the next day from a bank.
Source: Reuters, 10.01.02, 6:57 PM ET
48
CONCLUSION No 3
IT IS IN THE BANKS’ INTEREST
TO EXERSIZE OR DEMAND
COMMODITIES RISK MANAGEMENT
49
WHOM TO ADDRESS ?
BULLION BANKS
OCHIR CONSULTING CO., LTD.
e-mail: [email protected] 50
YOUR ADVISOR OCHIR CONSULTING CO., LTD. INTRODUCING COMMODITIES RISK
MANAGEMENT TECHNIQUES IN MONGOLIA IN CO-OPERATION WI BANK OF MONGOLIA AND GOLD MINERS, CONNECTING THEM TO INTERNATIONAL MARKETS,
BULLION AND METALS MARGIN TRADING WI THE 24-HOUR MONITORING AND DEALING DESK
SEMINARS AND TRAINING FOR THE MINERS IN ASSOCIATION WI MINERS’ ASSOCIATION OF MONGOLIA, BANK OF MONGOLIA, MINERALS DEVELOPMENT CENTER, BANKERS ASSOCIATION OF MONGOLIA.
ASSISTING IN CORPORATE BOND ISSUE,
ASSISTING IN GOLD REFINING AGREEMENTS
51
YOUR ADVISOR OCHIR CONSULTING CO., LTD. MORE THAN 15 YEARS IN THE BULLION AND FOREX
4 YEARS AS DIRECTORS OF BANK OF MONGOLIA:
FX & BULLION RESERVE MANAGEMENT
INTERNAL CONTROL & ADMINISTRATION DEPTS
CABINET MEMBER PORTFOLIO HOLDING:
MINISTER OF FINANCE (1999-2000)
MINISTER OF JUSTICE (1999-2000)
DEPUTY MINISTER OF JUSTICE (1990-1992)
WORLD BANK & ADB FSAC PROGAMME- COMMODITIES RISK MANAGEMENT INITIATIVE FOR COPPER, GOLD & CASHMERE WAS MADE AS A REQUIREMENT FOR THE CONSEQUTIVE TRANCH DISBURSEMENTS WAS PUT AT OUR PROPOSAL
e-mail: [email protected] 52
YOUR ADVISOR
OCHIR CONSULTING CO., LTD.
Peace Avenue-44/753
Ulaanbaatar 14250 MN
Tel: +976 9918 5150
Email: [email protected]
e-mail: [email protected] 53
Project Principals Yansanjav OCHIRSUKH
Professional Occupations:
1993-99 Bank of Mongolia (Central Bank), gold trader, Director for Gold & FX Reserves, Member of Board
• Raised Net International reserves for the Bank fm
USD 4.0 mln in 1992 to USD 180 mln in 2000
• Twice negotiated and improved gold refining agreements for the Central bank
• Sold on net about 60 tons of gold
• Personal dealing record: around USD 20.0 mln
1996-97 Consultant on emerging economies, Operations Evaluations Department,
The World Bank, Washington DC
1999-2000 Finance Minister of Mongolia for three consecutive Governments
• Initiated and finalized Sovereign rating process for Mongolia fm S&P
• Initiated set up for commodities (copper, gold and cashmere) price risk management program for Government under the World Bank & ADB- financed FSAC Program
• Introduced Mongolia as Member of European Bank for Reconstruction & Development as well as European Investment Bank
• Closed 2 biggest troubled commercial banks
• Granted License 3 new commercial banks
• Governor of IMF, World Bank, ADB, EBRD & EIB for Mongolia
2000-Present OCHIR Consulting Ltd., President & CEO
e-mail: [email protected] 55
THANK YOU FOR YOUR KIND ATTENTION!
e-mail: [email protected] 56
Next class:
Visit to Bank of Mongolia Museum
Date &
Time
Venue
30-Oct-08
15:59 pm
Bank of
Mongolia
(The Central Bank)