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International market risk mngt

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Commodity Risk Management course for a Wind Horse University; Fall 2007, based on presentation for Gold mining companies in 2002 dedicated to 80-th anniversary of Gold Mining Industry in Mongolia

Commodity Risk Management course for a Wind Horse University; Fall 2007, based on presentation for Gold mining companies in 2002 dedicated to 80-th anniversary of Gold Mining Industry in Mongolia

Published in: Economy & Finance

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  • 1. 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 2
  • 3. MONGOLIA-BANANA REPUBLIC Major export items CU copper AU gold Cashmere  others 3
  • 4. 2 main ways to boost profitsKeep costs down,Commodities price risk management 4
  • 5. MINERS & DEALERSMINERS DEALERS 5
  • 6. MINERS & DEALERSMINERS DEALERS GEOLOGICAL  SUPPLY & SURVEY DEMAND  INTERNATIONAL MINING POLITICS  INTERNATIONAL PRODUCTION ECONOMICS 6
  • 7. GOLD CHART 1992-2002 e-mail: ochir_co@magicnet.mn 7
  • 8. COPPER CHART 1992-2002 MCU0, Close Monthly USD30Sep 1438.50 T30Sep 1438.50 3000 2800 2600 2400 2200 2000 1800 1600 1400 Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul 8
  • 9. GOLD CHART 1997-2002 9
  • 10. COPPER CHART 1997-2002 MCU0, Close Weekly USD18Oct 1497.25 T 2400 2300 2200 2100 2000 1900 1800 1700 1600 1500 1400 1300 Sep97 Jan98 May Sep Jan99 May Sep Jan00 May Sep Jan01 May Sep Jan02 May Sep 10
  • 11. COPPER CHART 2000/IX-02/X MCU0, Close Daily USD21Oct 1519.75 T 1950 1900 1850 1800 1750 1700 1650 1600 1550 1500 1450 1400 1350 1300 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 11
  • 12. GOLD CHART 2001-2002 e-mail: ochir_co@magicnet.mn 12
  • 13. COPPER CHART 2001/X-02/XMCU0, Close Daily USD21Oct 1519.75 T21Oct 1519.75 1680 1660 1640 1620 1600 1580 1560 1540 1520 1500 1480 1460 1440 1420 1400 1380 1360 1340 1320 Oct01 Nov Dec Jan02 Feb Mar e-mail: ochir_co@magicnet.mnJul Apr May Jun Aug Sep Oct 13
  • 14. GOLD CHART YI-IX/2002 e-mail: ochir_co@magicnet.mn 14
  • 15. VI/4-VIII/1 LOST OPPORTUNITY FOR 1 TONN OF GOLD1 TONN= 1 000 000 gramm = 32 150,7206.04.02 $ 330,00 32 150,72 10 609 738, 4508.01.02 $ 298,00 32 150,72 9 580 914, 56LOST OPPORTUNITY $ 1, 028, 823. 89 15
  • 16. IS COMMODITY PRICE RISK A FORSE MAJOR?NOT REALLYIS THERE A WAY OF AVOIDINGCOMMODITY PRICE RISK?YES!AND IT SHOULD BE HANDLED! 16
  • 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 17
  • 18. NECESSITY OF COMMODITIES PRICE RISK MANAGEMENT  BANK REQUIREMENT  RAISES CREDIT RATING FOR MINERS 18
  • 19. NECESSITY OF COMMODITIESPRICE RISK MANAGEMENT Meridians 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 19
  • 20. NECESSITY OF COMMODITIES PRICE RISK MANAGEMENT  HELPS TO ISSUE SHARES ON STOCK EXCHANGES  HELPS IF THE MINE WANTS TO ISSUE INTERNATIONAL CORPORATE BONDS 20
  • 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 21
  • 22. REAL INTEREST RATE DIFFERETIALS: WORLD VS MONGOLIA INTEREST RATES, 12 MONTHS LOCAL CURRENCY Annual REAL INTEREST INTEREST RATES IN Inflation RATE IN MONGOLIA (CPI) MONGOLIA min min2002.9.30 17,0% 3,1% 13,9% FOREIGN CURRENCY LIBOR, (USD) INTEREST 12 months: INTEREST RATE RATES IN MONGOLIA USD DIFFERENTIALS min2002.9.30 12,0% 1,7% 10,3% 22
  • 23. STANDARD & POORS Sovereign Ratings List Ratings are as of September 19, 2002 (updated weekly) Local Currency Foreign Currency Long- Short- Long- Short-Sovereign term Outlook term term Outlook term rating rating rating ratingArgentina SD SD SD SDBulgaria BB Stable B BB- Stable BChina BBB Stable A-3Ecuador CCC+ Stable C CCC+ Stable CIndia BB+ Negative B BB Negative BIndonesia B- Stable C CCC+ Stable CMongolia B Stable B B Stable BMorocco BBB Negative A-3 BB Negative BPakistan B+ Stable B B- Stable BPanama BB Stable BB Stable BRussia BB- Stable B BB- Stable BSenegal B+ Stable B B+ Stable BTurkey B- Negative C B- Negative CUkraine B Stable B B Stable BUruguay B Negative B B Negative BVenezuela B Negative BVietnam BB Stable B BB- Stable B 23
  • 24. ERDENET GOT “” RATINGS T A N D A R D & P O O R’SResearch: Erdenet Mining Corp. Assigned First Corporate Credit Rating In MongoliaPublication date: 14-Mar-2002Analyst: Peter Stephens, Melbourne, John Bailey, HK MELBOURNE (Standard & Poors) March 14, 2002--Standard & Poors 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. 24
  • 25. CONDITIONS OF ERDENETCORPORATE BOND ISSUE MINIMUM AMOUNT = $ 50-100 INITIAL MATURITY- 3 YEARS INT= LIBOR + COUNTRY + COMPANY RISK RISKINT = 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 25
  • 26. COMMODITIES PRICE RISKMANAGEMENT TECHNIQUESSPOT ORDERSFORWARD CONTRACTSOPTION CONTRACTSSWAP CONTRACTS e-mail: ochir_co@magicnet.mn 26
  • 27. GOLD CHART YI-IX/2002 e-mail: ochir_co@magicnet.mn 27
  • 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: ochir_co@magicnet.mn 28
  • 29. Forward contractsF = S+S *dI/100*dT/ 360F = Forward pricesS = Spot pricesdT = Contract maturity /in days/dI = Difference btwn USD and Gold Interest rates /in per cent/ e-mail: ochir_co@magicnet.mn 29
  • 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 S 900,00 USD dT= 30 LIBOR I(Au) 2% 1% d(T) 30F=900+ F 900,525 USD 900*(0.7/100)*30/360F=900.525 e-mail: ochir_co@magicnet.mn 30
  • 31. Forward contracts BENEFITS COSTS COMPLETE  NO DIRECT COSTS INSURANSE AGST ASSOCIATED PRICE DROPS  PRODUCER MAY PROVIDES LOSE POTENTIAL CLEARANCE AND PROFIT FROM STABILITY IN PRICE INCREASES FOLLOWING BUSSINESS PLANS IN CASE PRICES RISE e-mail: ochir_co@magicnet.mn 31
  • 32. GOLD CHART YI-IX/2002 e-mail: ochir_co@magicnet.mn 32
  • 33. OPTION CONTRACTSBY BUYING PUT OPTIONMINER GETS THE RIGHT TOSELL THE COMMODITY ATPRICE, QUANTITY, ANDMATURITY PRESET AT THECONTRACT DATE. e-mail: ochir_co@magicnet.mn 33
  • 34. OPTION CONTRACTS PROFIT/LOSS ON PUT OPTION (STRIKE @ $318) $20 $15PROFIT / LOSS $10 $5 $0 295 300 305 310 315 320 325 330 335 -$5 e-mail: ochir_co@magicnet.mn 34
  • 35. OPTION CONTRACTS BENEFITS COSTS COMPLETE  OPTION PREMIUM INSURANSE AGST PRICE DROPS PRODUCER GETS FULL BENEFITS FROM PRICE INCREASES IN CASE PRICES RISE e-mail: ochir_co@magicnet.mn 35
  • 36. OPTION CONTRACTSOPTION-FREEDOM OF CHOISE OPTION - FREEDOM OF CHOISE OPTION – INSURANCE AGST COMMODITIES PRICE DROP e-mail: ochir_co@magicnet.mn 36
  • 37. OPTION CONTRACTS 1994 - AIGI OFFERED PUT OPTION TO ERDENET AT A STRIKE OF $2,800 WHEN SPOT COPPER PRICES WERE AROUND $3,000 e-mail: ochir_co@magicnet.mn 37
  • 38. COPPER CHART 1992-2002 MCU0, Close Monthly USD30Sep 1438.50 T30Sep 1438.50 3000 2800 2600 2400 2200 2000 1800 1600 1400 Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul 38
  • 39. POTENTIAL ANNUAL PROFIT OF ERDENET IF IT BOT PUT OPTION @ STRIKE $2,800ANNUAL ERDENET COPPER SALESin0.9999 of metal 120,000.001995.01 $ 2,800.00 120,000.00 $ 336,000,000.0010.01.02 $ 1,440.00 120,000.00 $ 172,800,000.00ANNUAL LOST OPPORTUNITY- 2002 $163,200,000.00 39
  • 40. SWAP CONTRACTSWe have a swap transaction if thecommodity is sold on spot andbought back at forward dateor bought on spot and sold out on aforward date. 40
  • 41. GOLD CHART YI-IX/2002 e-mail: ochir_co@magicnet.mn 41
  • 42. SWAP TRANSACTIONS BENEFITS WEAK POINTS ALLOWS TO FULFILL  NO DIRECT COST FINANCIAL OBLIGATIONS  WON’T INSURE IN CASE OF FROM A PRICE UNPLEASANT PRICE DROP CONDITIONS ALLOWS TO RAISE FUNDS AT A MINIMUM COST WHEN REQUIRED 42
  • 43. CONFRONTATION ?“I KNOW MY JOB!” “NO LOAN!” 43
  • 44. CO-OPERATION ? 44
  • 45. CONCLUSION No 1 IS COMMODITY PRICE RISK A FORSE MAJOR?NOT REALLYIS THERE A WAY OF AVOIDING COMMODITY PRICE RISK?YES!AND IT SHOULD BE HANDLED! 45
  • 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 46
  • 47. WHAT IS INT’L PRACTICE? Meridians 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 47
  • 48. CONCLUSION No 3 IT IS IN THE BANKS’ INTEREST TO EXERSIZE OR DEMAND COMMODITIES RISK MANAGEMENT 48
  • 49. WHOM TO ADDRESS ? BULLION BANKS OCHIR CONSULTING CO., LTD. 49
  • 50. YOUR ADVISOROCHIR 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 e-mail: ochir_co@magicnet.mn 50
  • 51. YOUR ADVISOROCHIR 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 51
  • 52. YOUR ADVISOROCHIR CONSULTING CO., LTD.Peace Avenue-44/753Ulaanbaatar 14250 MNTel: +976 9918 5150Email: ochir.consult@gmx.com e-mail: ochir.consult@gmx.com 52
  • 53. Project PrincipalsYansanjav 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: ochir_co@magicnet.mn 53
  • 54. SPECIAL GRATITUDEBRIGHT STUDENTS OF GLOBAL LEADERSHIP UNIVERSITY e-mail: ochir_co@magicnet.mn 54
  • 55. THANK YOUFOR YOUR KIND ATTENTION! e-mail: ochir_co@magicnet.mn 55
  • 56. Next class:Visit to Bank of Mongolia MuseumDate & VenueTime30-Oct-08 Bank of Mongolia15:59 pm (The Central Bank) e-mail: ochir_co@magicnet.mn 56

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