FAQs on scrap futures hedging

Mar 26, 2013 | 07:00 PM | AMM staff

Tags  CME Group Inc., Harriet Hunnable, U.S. Midwest scrap futures contract, Young-Jin Chang, AMM U.S. Midwest Ferrous Scrap Index, CME Globex, CME ClearPort

A quick guide and tool for those watching and wondering about the evolution of futures contracts and indices, tools that aim to bring stability to the ferrous scrap market.

What is a futures contract?
Futures contracts are financial risk management tools. A futures contract is a contractual agreement to buy or sell a commodity or financial instrument at a pre-determined price in the future, enabling companies to hedge risks associated with general economic and market factors. A futures contract details the quality and quantity of the underlying asset. Some futures contracts call for physical delivery of the asset, while others are settled in cash. Exchange-traded futures contracts are available for many commodities and financial instruments, such as nonferrous metals, oil, currencies, indices, equities, bonds and, more recently, steel and scrap.

What are ferrous scrap futures contracts?Like steel futures contracts, scrap contracts are a financially settled derivative, which means there won’t be actual physical delivery of the product. Scrap futures provide dealers, consumers and generators of scrap a tool to offset price risk in a given price scenario, like protecting inventory in a downward move or to lock in prices forward for longer periods. CME Group Inc. managing director of metal products Harriet Hunnable said the scrap contract is an “effective tool to enable price risk management throughout the entire supply chain, from raw materials to finished steel products. In addition to being an efficient risk-management tool for regional industry participants, we firmly believe our U.S. Midwest scrap futures contract has the potential to become a global benchmark for price discovery and managing volatile input prices.”....





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