CASE STUDY NG DNG HP NG GIAO SAU (BN GC)

Basing on the habit of zinc purchasing over many years in the past and the orders for 2012, ABC
Inc figured out the volume in need to import monthly; which brought the benefits to both
customers and ABC Inc as well. In the meantime, the company might participate in the London
Metal Exchange to buy zinc futures contract for hedging the risk of price's fluctuation. ABC Inc
had to base on the demand for zinc from its customers to decide the date and the quantity of zinc
to buy on LME. ABC Inc hedged by using futures to avoid the increase in zinc price in the next
three months, in such case: the loss due to buying zinc at spot on physical market would be offset
by the profit created from buying zinc on the futures market. Thus, ABC Inc should have
determined the expiration date on the futures contract to be coincidence with the date the
company had to buy zinc on cash market, which would close the company's position on London
Metal Exchange. All the futures contracts traded by ABC Inc expiration date of three months.
That type of contract was recommended to be high liquidated on LME when needed. However,to
ensure that the company had enough commodities in stock for customers' demand, ABC Inc
should have bought zinc at spot on physical market within 15 days before the delivery date
stipulated in domestic sale contract Basing on data of cash and 3-month price during 6 years, we
could make a forecast for the trend of zinc price in 2012. While with the data of monthly changes
in zinc price collected in 2011, we could suggest a hedge ratio that plays an important role in
finding out the optimal numbers of contract bought on LME by ABC Inc

1. What is the hedge ratio for futures contract? Most of the big-size orders from ABC Inc's
customers had been deposited with the percentage of 15% of forward contract's value which has
been signed by ABC Inc and its customers, then it was suggested that ABC Inc should have
hedged the position on London Metal Exchange with the ratio of 100%. On October 03, 2011,
ABC Inc Company and Hoa Phat group signed a purchase contract in which stated that on
January 18, 2 ABC Inc would deliver to Hoa group 1400 tons of zinc for 1,939.00 USD/MT; Hoa
Phat group deposited for ABC Inc 15% of the contract value. The payment would be made
within 15 days before the delivery date, which was on January 03, 2012. The selling price
stipulated in the contract is the forward price of zinc in the next 3 months

This price was calculated by basing on the value of the current price of zinc; LIBOR interest rate
offered to ABC Inc by Vietnamese bank for USD loan, the initial basis risk, the storage charges
on the physical market and the fees ABC Inc had to pay for initiating the position on the LME
futures market (5 USD) as well. On October 03, 2011, the borrow rate in USD for companies
who possessed the credit rating as the same as ABC Inc Company was 5% per year. The spot
price of zinc quoted on the LME on October 03, 2011 was 1,847.50 USD/MT, Storage charges
was 30 USD/MT Meanwhile, the 3-month price of zinc on the LME was offered at the time of
October 03 2011 was at 1,871.00 USD/MT, lower than 1900.54USD/MT.

2. What is the strategy of hedging we had proposal to ABC Inc Company on LME? The futures
contract ABC Inc bought on LME had duration of 3 months; it meant that the expiry date of the
contract was on January 03, 2012. To initiate the position on the LME ABC Inc was required to
follow the terms and conditions as below:

Initial deposit: 10% of the contract value

Maintenance margin: 10% of the initial deposit

Transaction costs for opening and closing account at clearing house of LME per time 0.016% of
one contract value. These fees must be deposited at the time of opening

After entering into futures contract on LME, all the losses and profit arising from the fluctuation
of zinc price on futures market had been tracked as below:
3. Fill in the above table

4. Analyze the company outcomes under the following scenarios:

Scenario 1: on December 29, 2011, the zinc price in the spot market dropped to USD 1,798.00/
MT Meanwhile, the futures contract which had the identical characters to the one ABC Inc had
long on October 03, 2011 was offered to be purchased at USD this price was referred from the
spot price and 3-month price of zinc quoted on December 29, 2011. The spot price on physical
market and the 3-month price of zinc on LME were USD 1,798.00/MT and USD 1,818.00/MT
respectively.

Scenario 2:
 Since November 30, 2011, ABC Inc realized that the zinc price had a trend of upward. At some
point of time, the price was even higher than the sale price ABC Inc had offered to Hoa Phat
group. Thus, the company should have closed its position on the futures market to end in profit
and waited until 2 or 3 days later on which there was a signal price falling, then to buy zinc on
the spot market; which ensured that there would be commodity available in stock for delivering
on January 18, 2012. As could be seen from the price quotation on the LME the zinc price from
November 30, 2011 onwards increased dramatically and started to fluctuate erratically. However,
up to December 08, 2011, the price tended to move back to the milestone of under 2,000.00
USD/MT. The bid price for the futures contract was quoted at 2,010.56 USD/MT-offered by the
broker, based on his reference to the spot price and the 3-month price on December 08, 2011. On
December 13, 2011, spot price was 1,933.00 USD/MT.

Scenario 3: Supposed on December 08, 2011, ABC Inc closed the futures contract and bought
zinc on the spot market at the price of 2,006.00 USD/MT simultaneously