Cross border spread income swap opens up domestic and overseas risk management channels

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At present, there are still many difficulties in cross-border trade risk management of domestic physical enterprises. Futures operating institutions can open up domestic and overseas risk management channels for physical enterprises through over-the-counter derivatives such as "cross-border spread" income swap products.

The processing raw material of an aluminum products foreign trade company in Guangzhou (hereinafter referred to as Company A) is electrolytic aluminum, which is purchased in the domestic market, and aluminum products are exported. In February 2022, the overseas aluminum price will rise significantly, and the difference between domestic and overseas aluminum futures prices will continue to grow, highlighting the risk management needs of Company A.

On the one hand, Company A needs to purchase raw materials in batches in China, and the purchase cost is uncertain. On the other hand, due to the rise of overseas aluminum prices, overseas purchasers are unwilling to sign contracts at the current price, and need to change to the long-term agreement mode of monthly average price. Company A cannot lock in the sales profit in advance.

In this case, Company A needs to hedge in the domestic and overseas futures markets at the same time to achieve the dual purpose of locking the purchase and sales prices. However, Company A is facing many practical difficulties. First, the hedging channel of overseas futures is not smooth; Second, margin needs to be calculated separately for domestic and overseas futures hedging, which occupies too much capital; Third, the transactions were carried out in domestic and overseas futures exchanges, and the valuation of hedging positions could not be offset.

Huatai Great Wall Capital Management Co., Ltd. (hereinafter referred to as Huatai Great Wall), the risk management subsidiary of Huatai Futures, has developed a cross-border spread income swap scheme for Company A. By locking the price difference between domestic and foreign aluminum futures prices, it helps Company A avoid the risk of aluminum price fluctuations in foreign trade business, locks in export profits in advance, and stabilizes the company's operation.

Yu Chenggang, general manager of Huatai Great Wall, told reporters that under this scheme, the purchase price of company A is composed of aluminum futures price of Shanghai Futures Exchange (SHFE aluminum) plus fixed premium; The sales price is composed of LME AL plus fixed processing fees. The aluminum futures price is agreed to be the monthly average of the futures settlement price in March of the month of shipment. Based on the hedging needs of enterprises, Huatai Great Wall designed the "SHFE aluminum LME AL × exchange rate" aluminum cross-border price difference target by combining the futures prices of SHFE aluminum and LME AL, and then met the needs of enterprises to lock the purchase and sales prices simultaneously through income swap transactions.

For Company A's domestic raw material purchase hedging needs, Huatai Great Wall completed hedging through the domestic futures market; For Company A's overseas sales price hedging needs, it conducts hedging transactions with domestic licensed institutions and completes overseas futures hedging.

During the implementation of the scheme, the price difference of aluminum at home and abroad returned significantly, from an export window that was high outside and low inside to an import window that was low outside and high inside, resulting in a loss in the spot export business of Company A. However, as the "cross-border spread" income swap transaction made profits in the process of price difference regression, Company A realized a hedging income of about 8.2 million yuan, which fully covered the risk of price fluctuations in foreign trade export business.

In Cheng Gang's view, the "cross-border price difference" income swap product has solved the multiple problems of foreign trade enterprises' hedging: first, it has solved the problem of cross-border hedging. The second is to improve the efficiency of capital use through cross-border swap product design. If domestic futures hedging and overseas futures hedging are carried out respectively, there is a problem that the margin is occupied too much, and the "cross-border spread" income swap product can save unilateral margin. Third, risk valuation consolidation has solved the pressure of margin coverage within the duration. When the transactions are conducted in domestic and overseas futures exchanges respectively, the hedging position cannot be offset to calculate the valuation during its duration. The "cross-border spread" income swap product consolidates the valuation of domestic and overseas futures trading positions, so that enterprises only need to bear the risk of fluctuations in the price difference between domestic and overseas targets, reducing the possible pressure on recourse, and thus reducing the pressure on enterprises' capital.

In this case, Huatai Great Wall actively played the risk management function of the futures market in view of the characteristics of the foreign trade processing trade enterprises that "purchase inside and sell outside" and face the risks of both domestic and overseas markets, provided enterprises with customized risk management service plans to open up domestic and overseas risk management channels, and helped enterprises effectively avoid risks, Realize the stability of enterprise production and operation.

label: risk management Income swap