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

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 200%

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 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 625 650 675 700 725 750 775 800 825 850 875 900 925 950 975 1,000 1,025 1,050 1,075 1,100 1,125 1,150 1,175 1,200 1,225 1,250 1,275 1,300 1,325 1,350 1,375 1,400 21um Volatility 21 MPG

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

5.2 Basis risk: micron

§ Bought and sold the same type, but the micron differs: 19 vs 21 and 18 vs 19 eg.s

18 vs 19 AWEX MPG in AUD c/kg Clean 1998 - 2006

50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900

Aug-98 Oct-98 Dec-98 Feb-99 Apr-99 Jun-99 Aug-99 Oct-99 Dec-99 Feb-00 Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01 Apr-01 Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06

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

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 Futures 50

• 250
• 200

Total (ALL) 250

• 350
• 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

THE END