Research On Risk Hedging With Futures And Options Of Soybean Trade Of Jilin Grain Co.,Ltd

In recent years, with the improving of the living standard of the Chinese people, the demand for soybean oil is dramatically increased. Since the domestic soybean production is too low too meet the increasing crush demand, the Chinese crush plants have to import over 50 million tons of soybeans from abroad per year. Although china is the biggest importer of soybean in the world it has no rights to price itself,the cash price is mainly determined by the future pricing the CME (Chicago Merchandise Exchange). Since the future price has the nature of high volatility and wide fluctuation range, the great risks of future pricing are facing the crush plants. Moreover, when the crush plants finished pricing in the CME they will still have to solve another problem coming forward. How to get the down-steam products of soybean sold in the domestic cash market profitably is a big challenge and of great importance .Due to the different consumption status of the feeding industry and the impact of the macro-control measures the cash price for the soybean meal and soybean oil could be undervalued and which will probably cause the loss for selling of the products.In this paper, I take Jilin Grain Company (hereinafter referred to as JGG) as an example, starting from the introduction of the pricing mechanism for soybean, by making a sound and deep analysis about the formation of the import cost, the procedure for pricing and the influencing factors for the down-stream products, the great risks facing the JGG in the process of procurement and sales are revealed. To hedge the risks aforesaid two methods of hedging are introduced in this paper which is hedging the selling risks for the down-stream products with relevant future contracts in DCE (Dalian Commodity Exchange) and hedging the pricing risks directly with the options in CME. Firstly, prove the high correlation between the relevant products in DCE and CME by using statistically method and then put forward the idea that it is feasible to make the hedge with DCE for the soybean importing according to the correlation. Secondly, considering the limitations of the DCE hedging method, the principle of application for options is explained and analyzed in details, as well as the applications of various strategies, and put forward the idea of hedging the pricing risks with options rolling method according to the DELTA neutral theory. Finally, in the conclusion the two hedging methods are compared and which points out that to realize the maximum profits the crush plants will have to make the hedge with future markets.