On Application Of Derivatives In Risk Management Of Jiangxi Copper Company Limited

Most nonferrous metal producers are multinationals,and the risks they face are more complicated than companies that operate domestically only.In terms of the prices of raw materials and products,multinationals could be affected by both domestic and foreign factors.The rate of exchange and interest are changeable,which also bring more unpredictable risks to multinationals.Nowadays,commodity prices fluctuate significantly,and the exchange rate between the US dollar and the RMB fluctuates especially significant,and the direction of fluctuations is hard to predict.In addition,due to the interest rate reform,Chinese enterprises are facing increasingly more risks from the fluctuations of interest rate.Among the methods of risk management,derivatives are diversified,widely used and convenient to use,which are quite popular among transnational nonferrous metal producers.Jiangxi Copper Company Limited(JCCL)is one of the largest nonferrous metal producers in China,which uses various kinds of derivatives in risk management,and the data records regarding derivatives are sufficient.Consequently,this paper choose JCCL as the case and analyze the use of derivatives,hoping to find out the existing problems and put forward corresponding solutions.This paper firstly introduces the background and significance of this research,and then describe the status of relative research,the framework and research methods.Then,give some information about relevant definitions,such as price risk,exchange rate risk,and interest rate risk.After that,introduce the principles of using derivatives and the methods to evaluate the effect of using derivatives,after this part,basic information about JCCL and the necessity of using derivatives are introduced.As well as the objectives and strategies of using derivatives,on this basis,analyze the existing problems and put forward corresponding solutions.The conclusions of this paper are: On the whole,derivatives helped JCCL to hedge risks,but have a negative impact on gross profit,net profit after irregular items and net cash flow.Derivatives related to copper helped JCCL to hedge risks,but had a negative impact on gross profit,net profit after irregular items and net cash flow.Derivatives related to gold did not help JCCL to hedge risks,and had a negative impact on gross profit.Instead of helping JCCL to hedge risks,foreign-exchange derivatives increased the volatility of foreign-exchange profit and loss(P&L).Derivatives related to interest rate had no significant effect on interest payable.In respect of the problems related to the application of derivatives by JCCL,it is necessary for JCCL to continue to hire professional organizations in order to formulate optimal hedging plans.And departments responsible for hedging should be independent enough in order to avoid being affected by other departments.The effect of risk hedging should be adopted as a key indicator to access the apartment,rather than derivative P&L.Besides,measures should be taken to avoid other risks like being forced to close out by the exchange,unable to find a counterparty,or violating restrictions on the amount of derivative holdings or the frequency of quotation and withdrawal.